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SELECTED ARTICLES ON 

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COMPILED BY 

LAMAR T. BEMAN, A. M., LL. B. 

ATTORNEY AT LAW 

CLEVELAND, O. 



NEW YORK 

THE H. W. WILSON COMPANY 

LONDON : GRAFTON dc CO. 

1921 



< 



PUBLISHED DECEMBER, 1921 
Printed in the United States of America 



2 X I % 4 



EXPLANATORY NOTE 

The tremendous burden of war debt that is now borne by 
our federal government, the interest on which must be met 
annually and the principal of which must be slowly paid off, 
makes the subject of taxation an important, even if an unpleasant, 
issue in our national affairs. In state and local matters taxation 
is also made an important question by the ever increasing 
demand for additional funds and by the loss of the revenue 
formerly obtained from the taxes on the liquor traffic. The 
pressing need of the states, and more particularly of the cities 
and other local governments, for increased revenue has been 
constantly growing more acute because modern progress demands 
of these governmental agencies more and better service. 

Amazing and disheartening, under these conditions, are the 
evidences of misunderstanding of so vital public issues as the 
different phases of the taxation problem. One prominent business 
man testified before the Ways and Means Committee that he 
did not think that there was any such thing as a science of 
taxation ! On another occasion a business man of prominence 
declared in a public address that all taxes are consumption taxes ! 
In many pamphlets that have been widely distributed careful 
arguments are given to show that a certain proposed tax will be 
so "painless" that nobody will really notice it, but that it will 
yield between $3,000,000,000 and $5,000,000,000 of revenue each 
year; $150 a year from the average family and nobody notice 
it ! We read in another pamphlet that a certain tax is so popular 
in the Philippines that "a revolution would occur if any attempt 
were made to repeal it!" A printed report by a state tax com- 
mission quotes at some length from Henry C. Adams's Public 
Finance and says that it is giving the words of Professor 
Thomas S. Adams of Yale. A report on federal taxation by a 
special committee of a great national organization of business 
men gives the "Four maxims of Adam Smith" but entirely 
omits the first and chief of his maxims. More amazing still were 
the revelations made a decade ago by Professor Seligman 
concerning the circumstances that surrounded the annulment bv 



vi EXPLANATORY XOTE 

the United States Supreme Court of the federal income tax 
in 1895. (See Seligman, The Income Tax. Part II. Chapter 5) 

These things show that to the group of vital problems con- 
cerning taxation there must be brought more earnest thought 
and study and more sincerity. Too long has taxation been a 
matter of indifference and unreasonable criticism. It is the 
purpose of this volume, like the other volumes of the Handbook 
series, to make information on a vital public question easily 
available by reproducing th^ best that has been written on each 
side. 

In Part I is given some of the general principles of taxation. 
It deals especially with the question of apportionment and 
presents it in historical perspective. Part II deals with the 
proposed Sales Tax. Part III takes up the State Income Tax. 
In each part is a selected bibliography. In Parts II and III 
where debatable questions are considered, a brief is given on 
each side. 

Lamar T. Beman 

October 1, 1921. 



CONTENTS 

PART I 

GENERAL PRINCIPLES OF TAXATION 

Page 

Bibliography 3 

Introduction 7 

Discussion 

Adam Smith's Four Maxims 9 

Mill, John Stuart. General Principles of Taxation 12 

Walker, Francis A. Principles of Taxation 18 

Adams, Henry C. The Principle of Apportionment 26 

Seligman, Edwin R. A. The Fundamental Problems 36 

Brief Excerpts 49 

PART II 

THE SALES TAX 

Brief 53 

Bibliography 59 

Introduction 67 

Affirmative Discussion 

Bache, Jules S. Why Not a Sales Tax 

Review of Reviews 71 

Orcutt, B. S. Why a Sales Tax Administration 78 

Sales Tax Experience New York Times 89 

Smoot, Reed. Proposed Sales Tax 

Congressional Record 91 

Lord, Charles E. Brief Filed with the Tax Committee of 

the National Industrial Conference Board 102 

National Association of Manufacturers. Committee on 

Taxation. Report no 

An Income Tax Lesson Wall Street Journal 115 

Brief Excerpts , 116 

Negative Discussion 

Sales or Turnover Tax Report. National Industrial Con- 
ference Board. Tax Committee. Report 125 



viii CONTENTS 

Staub, Walter A. Why Not a Sales Tax. 



Administration 142 

Gompers, Samuel. Sales Tax — An Iniquitous Proposal.. 

American Federationist 159 

Substitutes for the Profits Tax New Republic 161 

Graham, Whidden. Where is the Tax Burden Going.... 

Nation 163 

Adams, Thomas S. Difficulties of the Sales Tax 166 

Frear, James A. A War Sales Tax During Peace 171 

Brief Excerpts 198 

PART III 
THE STATE INCOME TAX 

Brief 207 

Bibliography 213 

Introduction 223 

General Discussion 

Failure of the Personal Property Tax 225 

Proposed Personal Income Tax 246 

What Rigid Enforcement Would Mean 254 

Brief Excerpts 256 

Affirmative Discussion 

Income Tax. Michigan. 1920. Report 261 

Advantages of the Income Tax. New York. 1916. Report.. 279 

Income Tax. Louisiana. 1921. Report 289 

Ely, Richard T. Income Taxes 300 

Brief Excerpts 303 

Negative Discussion 

Taxation of Incomes. New York. 1907. Report 307 

State Income Taxes. Minnesota. 1910. Report 318 

Minority Report. New York 1916 Joint Committee 322 

Russell, Campbell. Taxation in Oklahoma... 336 

Minority Report. Assessment and Taxation Commission of 

Louisiana. 1921 340 

The Income Tax. Civic Federation of Chicago 342 

Brief Excerpts 345 



PART I 
GENERAL PRINCIPLES OF TAXATION 



BIBLIOGRAPHY 

An asterisk (*) preceding a reference indicates that the article or a 
part of it has been reprinted in this volume. A dagger (t) is used to 
indicate a few of the other best references. 

Other Bibliographies 

American Economic Review (quarterly) indexes in each issue 

the new material, books, articles in periodicals, pamphlets and 

documents on taxation and public finance. 
Bulletin of the National Tax Association (monthly) lists in each 

issue the new publications on taxation. 
Library of Congress. List of references on excise or internal 

revenue taxation, with special reference to consumption taxes. 

1918. typewritten. 8p. 
Plehn, Carl C. Introduction to public finance. Macmillan. 

1920. 

p. 435-7. Brief bibliography for supplementary reading. 
Seligman, Edwin R. A. The shifting and incidence of taxation. 

Columbia University Press. 1910. 

p. 399-424. Bibliography. 
Seligman, Edwin R. A. Essays in taxation. Macmillan. 191 1. 

422-4. Bibliography of American reports on taxation. 

Books and Pamphlets 

*Adams, Henry C. The science of finance. Henry Holt & 

Co. 1905. 
Armitage-Smith, G. Principles and methods of taxation. John 

Murray (London). 1919. 
Bastable, C. F. Public finance. Macmillan. 1895. 
Bliss, W. D. P. New encyclopedia of social reform. Funk & 

Wagnalls. 1908. 

p. 1 193-1202. Taxation. 
Bogart, Ernest L. Direct cost of the present war. Carnegie 

endowment for international peace. Oxford University Press. 

1918. 
Bogart, Ernest L. Direct and indirect costs of the great war. 

1919. 



4 SELECTED ARTICLES 

fBullock, Charles J. Select readings in public finance. Ginn 

& Co. 1920. 
Cohn, Gustav. (tr. T. B. Veblen) The science of finance. Uni- 
versity of Chicago Press. 1895. 
Cooley, Thomas M. Law of taxation. 1886. 
Cossa, Luiga. (tr. Horace White) Taxation, its principles and 

methods. G. P. Putnam's sons. 1889. 
Curtis, Vanderveer. The state tax system of Washington. 

Extension Division, University of Washington. 1916. 
Daniels, Winthrop M. The elements of finance. Henry Holt 

& Co. 1899. 
Ely, Richard T. and Finley, John H. Taxation in American 

states and cities. Thomas Y. Crowell & Co. 1888. 
Ely, Richard T. Outlines of economics. Macmillan. 1919. 

Chap. 34. p. 711-39. Federal, state, and local taxes. 
Ely, Richard T. Studies in the evolution of industrial society. 

Macmillan. 1903. 

Part 2, Chap. 8, p. 315-30. The Evolution of Public Expenditures. 
Fairlie, John A. A report on the taxation and revenue system 

of Illinois. Illinois Printing Co. 1910. 

Fetter, Frank A. The principles of economics. Century Co. 

1904. 

Chap. 49. p. 471-9. Taxation in its relation to value. 

Fillebrown, C. B. Taxation. A. C. McClurg & Co. 1914. 
Hobson, J. A. Taxation in the new state. Harcourt, Brace & 

Howe. 1920. 
Holmes, George E. Federal income tax, war profits and excess 

profits taxes. 1920. 
Howe, Frederick C. Taxation and taxes in the United States 

under the internal revenue system, 1791-1895. T. Y. Crowell 

& Co. 1896. 
Judson, F. N. A treatise on the power of taxation, state and 

federal, in the United States. F. H. Thomas law book Co. 

1917. 
Lyon, Hastings. Principles of taxation. Houghton, Mifflin 

& Co. 1914. 
Mathews, Frederic. Taxation and the distribution of wealth. 

Doubleday, Page & Co. 1914. 
Means, David M. The methods of taxation compared with the 

established principles of justice. Dodd, Mead & Co. 1909- 



TAXATION 5 

Mill, John Stuart. Principles of political economy. 
*Book 5, Chap. 2. Of the general principles of taxation. 
Book 5, Chap. 3. Of direct taxes. 
Book s, Chap. 4. Of taxes on commodities. 
Book 5, Chap. 5. Of some other taxes. 
Book 5, Chap. 6. Comparison between direct and indirect taxation. 

Montgomery, Robert H. Income tax procedure in 1921. The 

Ronald Press Co. 1921. 
National Conference on taxation, under the auspices of the 

national civic federation. Buffalo, 1901. 
National Industrial Conference Board. Proceedings of the 

(first) national industrial tax conference at Chicago, 111. 

April 16, 1920. Special report no. 9. H3p. 1920. 
National Industrial Conference Board. Proceedings of the 

second national industrial tax conference, New York, Oct. 

1920. Special report no. 17. 196P. 1920. 
fNational Tax Association. Annual Conferences, Addresses 

and proceedings. 1907 and annually thereafter. Macmillan. 
fPlehn, Carl C. Introduction to public finance. Macmillan. 

1920. 
Proceedings of Conference held to consider the question of tax 

reform at Richmond, Va., Jan. 20-21, 1914. Whittet & 

Shepperson. 1914. 68p. 
Seager, Henry R. Introduction to economics. Henry Holt & 

Co. 1908. 

Chap. 28. p. 563-88. Taxation and tax reform in the United States. 
tSeligman, Edwin R. A. Essays in taxation. Macmillan. 1895. 
Seligman, Edwin R. A. Financial statistics of the American 

commonwealths. American statistical association. 1889. 
*Seligman, Edwin R. A. The income tax. Macmillan. 191 1. 

p. 1-38. The General Problems. 
fSeligman, Edwin, R. A. Progressive taxation in theory and 

practice. 1908. 
tSeligman, Edwin R. A. Shifting and incidence of taxation. 

Macmillan. 1910. 
*Smith, Adam. An inquiry into the nature and causes of the 

wealth of nations. 1776. 

Book 5. Chap. 2. Of the sources of the general or public revenue of 
the society. 
*Walker, Francis A. Political economy. Henry Holt & Co. 



Part 6. Chap. 16. p. 488-505. The principles of taxation. 
Wells, David A. The theory and practice of taxation. D. 
Appleton & Co. 1907. 



6 SELECTED ARTICLES 

Periodicals 

Annals of the American Academy. 58 : 1-11. Mr. '15. Newer 
tendencies in American taxation. Edwin R. A. Seligman. 

Bulletin of the University of Washington. University Extension 
series no. 12. General series no. 84. Ag. '14. Taxation in 
Washington; papers and discussions of the state tax con- 
ference at the University of Washington May 27-9, 1914. 

Columbia University Quarterly. 18 : 122-35. Mr. '16. The rela- 
tions of federal, state, and local revenue. Edwin R. A. 
Seligman. 

Economic Journal. 4 : 639-67. D. '94. The American income 
tax. Edwin R. A. Seligman. 

Equity Series. 7 : 1-168. Ap. '05. The elements of taxation. 
Newton M. Taylor. 

Fortnightly Review. 108 : 499-510. Mr. '21. Rates and taxes. 
J. E. Allen. 

Indiana University Bulletin. 12 : 1-189. F. '14. Proceedings 
of a conference on taxation in Indiana. 

Johns Hopkins University Studies. 18 : 1-253. Ja-Ap. '00. 
Studies in state taxation with particular reference to the 
southern states. J. H. Hollander. 

League of Nations. 4 : 299-364. Ag. '21. The staggering burden 
of armament ; II What America has spent for war and peace. 
World Peace Foundation. 

Public Opinion. 13 : 49"54- Ap. 23, '92. Changes necessary to 
secure equitable taxation. Walter E. Weyl, Robert Luce, 
Bolton Hall. 

Political Science Quarterly. 13 : 442-76. S. '98. Direct and 
indirect taxes in economic literature. Charles J. Bullock. 

Political Science Quarterly. 3 : 1-16. Mr. '88. The bases of 
taxation. Francis A. Walker. 

Quarterly Journal of Economics. 9 : 26-46. O. '94. The new 
income tax. Charles F. Dunbar. 

Reports from the Consuls of the United States, nos. 99-100. 
N. D. '88. Taxation in various countries. 

Review of Reviews. 63 : 172-5- F- ' 2I - How the taxpayers' 
money is spent. Stanley H. Howe. 



INTRODUCTION 

"It is nevertheless probably true that there is not, at the 
present time, a single existing tax decreed by despotism, 
or authorized by the representatives of the taxpayers, which has 
been primarily adopted or enacted with reference to any involved 
economic principles, or which has primarily sought to establish 
the largest practical conformity, under the existing circumstances, 
to what are acknowledged to be the fundamental principles of 
equity, justice, and rational liberty." These were not the rash 
words of any violent and unthinking radical in whose clouded 
mind, conscious of many social wrongs and personal misfortunes, 
were some vague ideas of a visionary scheme of taxation that 
would better the condition in life of the most unfortunate of 
mankind. They were the words of David A. Wells, one of 
America's foremost scholars and practical experts in taxation, 
a man who had prepared fifteen reports for the government of 
the United States, had served four years as special commissioner 
of revenue for the federal government, and was a member of 
the faculty at Yale. 

Congressmen and legislators all too often follow the maxim 
of Colbert, that "The art of taxation consists in so plucking the 
goose as to procure the largest quantity of feathers with the 
least possible amount of hissing," rather than the classic maxims 
of Adam Smith or the enlightened discussions of later econom- 
ists. They know that some classes make more hissing than 
others, and the frequency of elections all too often makes 
uppermost in their minds the matter of their own reelection. 

In 1776, the year made famous by the adoption of the 
American Declaration of Independence, Adam Smith published 
his Inquiry into the Nature and Causes of the Wealth of 
Nations. In the following pages we quote from this great 
and epoch making work the four classic maxims concerning 
taxation and give some of the best of the later comment upon 
them by the ablest authorities of different generations. This 



8 SELECTED ARTICLES 

and some of the more recent discussions of the general principles 
are given as the first part of this volume, to give the reader a 
foundation for the problems taken up in the second and third 
parts. 



DISCUSSION 

ADAM SMITH'S FOUR MAXIMS 1 

The private revenue of individuals, it has been shown in the 
first book of this inquiry, arises ultimately from three different 
sources : rent, profit, and wages. Every tax must finally be paid 
from some one or other of those three different sorts of revenue, 
or from all of them indifferently. I shall endeavor to give the 
best account I can, first, of those taxes it is intended should 
fall upon rent; second, of those which it is intended should fall 
upon profit; third, of those which it is planned should fall upon 
wages ; and, fourth, of those which it is intended should fall 
indifferently upon all those three different sources of private 
revenue. The particular consideration of each of these four 
different sorts of taxes will divide the second part of the present 
chapter into four articles, three of which will require several 
other subdivisions. Many of those taxes, it will appear from 
the following review, are not finally paid from the fund or 
source of revenue, upon which it was intended they should fall. 

Before I enter upon the examination of particular taxes, it is 
necessary to premise the four following maxims with regard to 
taxes in general. 

I. The subjects of every state ought to contribute toward 
the support of the government, as nearly as possible in propor- 
tion to their respective abilities ; that is, in proportion to the 
revenue which they respectively enjoy under the protection of 
the state. The expense of government to the individuals of a 
great nation is like the expense of management to the joint 
tenants of a great estate, who are all obliged to contribute in 
proportion to their respective interests in the estate. In the 
observation or neglect of this maxim consists what is called 
the equality or inequality of taxation. Every tax, it must be 
observed, once for all, which falls finally upon one only of the 
three sorts of revenue above mentioned, is necessarily unequal, 

1 By Adam Smith. An Inquiry into the Nature and Causes of the 
Wealth of Nations. (1776). Book V, Chap. 1, Part 2. 



io SELECTED ARTICLES 

in so far as it does not affect the other two. In the following 
examination of different taxes I shall seldom take much further 
notice of this sort of inequality, but shall, in most cases, confine 
my observations to that inequality which is occasioned by a 
particular tax falling unequally even upon the particular sort of 
private revenue which is affected by it. 

2. The tax which each individual is bound to pay, ought 
to be certain, and not arbitrary. The time of payment, the 
manner of payment, the quantity to be paid, ought all to be 
clear and plain to the contributor and to every other person. 
Where it is otherwise, every person subject to the tax is put 
more or less in the power of the tax gatherer, who can either 
aggravate the tax upon any obnoxious contributor, or extort, 
by the terror of such aggravation, some present or perquisite 
to himself. The uncertainty of taxation encourages the insolence 
and favors the corruption of an order of men who are naturally 
unpopular, even where they are neither insolent or corrupt. The 
certainty of what each individual ought to pay is, in taxation, a 
matter of so great importance, that a very considerable degree 
of inequality, it appears, I believe, from the experience of all 
nations, is not near so great an evil as a very small degree of 
uncertainty. 

3. Every tax ought to be levied at the time, or in the 
manner, in which it is most likely to be convenient for the 
contributor to pay it. A tax upon the rent of land or of houses, 
payable at the same term at which such rents are usually paid, 
is levied at the time when it is most likely to be convenient for 
the contributor to pay ; or when he is most likely to have where- 
withal to pay. Taxes upon such consumable goods as are articles 
of luxury, are all finally paid by the consumer, and generally 
in a manner that is very convenient for him. He pays them 
little by little, as he has occasion to buy the goods. As he is at 
liberty too, either to buy, or not to buy, as he pleases, it must be 
his own fault if he ever suffers any considerable inconvenience 
from such taxes. 

4. Every tax ought to be so contrived as both to take 
out and to keep out of the pockets of the people as little as 
possible over and above what it brings into the public treasury 
of the state. A tax may either take out or keep out of the 
pockets of the people a great deal more than it brings into the 
public treasury, in the four following ways. First, the levying 



TAXATION ii 

of it may require a great number of officers, whose salaries 
may eat up the greater part of the produce of the tax, and whose 
perquisities may impose another additional tax upon the people. 
Second, it may obstruct the industry of the people, and dis- 
courage them from applying to certain branches of business 
which might give maintenance and employment to great mul- 
titudes. While it obliges the people to pay, it may thus di- 
minish, or perhaps destroy, some of the funds which might 
enable them more easily to do so. Third, by the forfeitures 
and other penalties which those unfortunate individuals incur 
who attempt unsuccessfully to evade the tax, it may frequently 
ruin them, and thereby put an end to the benefit which the 
community might have received from the employment of their 
capitals. An injudicious tax offers a great temptation to smug- 
gling. But the penalties of smuggling must rise in proportion 
to the temptation. The law, contrary to all the ordinary prin- 
ciples of justice, first creates the temptation, and then punishes 
those who yield to it; and it commonly enhances the punish- 
ment, too, in proportion to the very circumstances which ought 
certainly to alleviate it, the temptation to commit the crime. 
Fourth, by subjecting the people to the frequent visits and 
the odious examination of the tax-gatherers, it may expose 
them to much unnecessary trouble, vexation, and oppression ; 
and though vexation is not, strictly speaking, expense, it is 
certainly equivalent to the expense at which every man would 
be willing to redeem himself from it. It is in some one or 
other of these four different ways that taxes are frequently so 
much more burdensome to the people than they are beneficial 
to the sovereign. 

The evident justice and utility of the foregoing maxims have 
recommended them more or less to the attention of all nations. 
All nations have endeavored, to the best of their judgment, to 
render their taxes as equal as they could contrive ; as certain, as 
convenient to the contributor, both in the time and in the mode 
of payment, and in proportion to the revenue which they 
brought to the prince, as little burdensome to the people. . . The 
following short review of some of the principal taxes which 
have taken place in different ages and countries will show that 
the endeavors of all nations have not in this respect been 
equally successful. 



12 SELECTED ARTICLES 



GENERAL PRINCIPLES OF TAXATION 1 

The qualities desirable, economically speaking, in a system 
of taxation, have been embodied by Adam Smith in four maxims 
or principles, which, having been generally concurred in by 
subsequent writers, may be said to have become classical, and 
this chapter cannot be better commenced than by quoting them. 
# * * 

The last three of these four maxims require little other 
explanation or illustration than is contained in the passage itself. 
How far any given tax conforms to, or conflicts with them, is 
a matter to be considered in the discussion of particular taxes. 
But the first of the four points, equality of taxation, requires to 
be more fully examined, being a thing often imperfectly under- 
stood, and on which many false notions have become, to a 
certain degree, accredited, through the absence of any definite 
principles of judgment in the popular mind. 

For what reason ought equality to be the rule in matters of 
taxation? For the reason, that it ought to be so in all affairs 
of government. As a government ought to make no distinction 
of persons or classes in the strength of their claims on it, 
whatever sacrifices it requires from them should be made to 
bear as nearly as possible with the same pressure upon all, 
which it must be observed, is the mode by which least sacrifice 
is occasioned on the whole. If any one bears less than his fair 
share of the burden, some other person must suffer more than 
his share, and the alleviation to the one is not, coeteris paribus, 
so great a good to him, as the increased pressure upon the other 
is an evil. Equality of taxation, therefore, as a maxim of poli- 
tics, means equality of sacrifice. It means apportioning the 
contribution of each person toward the expenses of government, 
so that he shall feel neither more nor less inconvenience from 
his share of the payment than every other person experiences 
from his. This standard, like other standards of perfection, 
cannot be completely realized; but the first object in every 
practical discussion should be to know what perfection is. 

There are persons, however, who are not content with the 
general principles of justice as a basis to ground a rule of 

iBy John Stuart Mill. Principles of Political Economy. (1848). Book 5. 
Chapter 2, sections 1-3. 



TAXATION 13 

finance upon, but must have something, as they think, more 
specifically appropriate to the subject. What best pleases them 
is, to regard the taxes paid by each member of the community 
as an equivalent for value received, in the shape of service to 
himself; and they prefer to rest the justice of making each 
contribute in proportion to his means, upon the ground, that 
he, who has twice as much property to be protected, receives, 
on an accurate calculation, twice as much protection, and ought, 
on the principles of bargain and sale, to pay twice as much for 
it. Since, however, the assumption that government exists solely 
for the protection of property, is not one to be deliberately 
adhered to ; some consistent adherents of the quid pro quo 
principle go on to observe, that protection being required for 
persons as well as property, and everybody's person receiving 
the same amount of protection, a poll tax of a fixed sum per 
head is a proper equivalent for this part of the benefits of 
government, while the remaining part, protection to property, 
should be paid for in proportion to property. There is in this 
adjustment a false air of nice adaptation, very acceptable to 
some minds. But in the first place, it is not admissable that 
the protection of persons and that of property are the sole 
purposes of government. The ends of government are as compre- 
hensive as those of the social union. They consist of all the 
good, and all the immunity from evil, which the existence of 
government can be made, either directly or indirectly, to bestow. 
In the second place, the practice of setting definite values on 
things essentially indefinite, and making them a ground of 
practical conclusions, is peculiarly fertile in false views of social 
questions. It cannot be admitted, that to be protected in the 
ownership of ten times as much property, is to be ten times as 
much protected. Whether the labour and expense of the protec- 
tion, or the feelings of the protected person, or any other definite 
thing be made the standard, there is no such proportion as the 
one supposed, nor any other definable proportion. If we wanted 
to estimate the degrees of benefit which different persons derive 
from the protection of government, we should have to consider 
who would suffer most if that protection were withdrawn ; to 
which question if any answer could be made, it must be, that 
those would suffer most who were weakest in mind or body, 
either by nature or by position. Indeed, such persons would 
almost infallibly be slaves. If there were any justice, therefore, 



i 4 SELECTED ARTICLES 

in the theory of justice now under consideration, those who are 
least capable of helping or defending themselves, being those 
to whom the protection of government is the most indispensable, 
ought to pay the greatest share of its price; the reverse of the 
true idea of distributive justice, which consists not in imitating 
but in redressing the inequalities and wrongs of nature. 

Government must be regarded as so preeminently a concern 
of all, that to determine who are most interested in it is of no 
real importance. If a person or class of persons receive so small 
a share of the benefit as makes it necessary to raise the question, 
there is something else than taxation which is amiss, and the 
thing to be done is to remedy the defect, instead of recognizing 
it and making it a ground for demanding less taxes. As in a 
case of voluntary subscription for a purpose in which all are 
interested, all are thought to have done their part fairly when 
each has contributed according to his means, that is, has made 
an equal sacrifice for the common object; in like manner 
should this be the principle of compulsory contributions; and 
it is superfluous to look for a more ingenious or recondite 
ground to rest the principle upon. 

Setting out, then, from the maxim that equal sacrifices ought 
to be demanded from all, we have next to inquire whether this 
is in fact done, by making each contribute the same percentage 
on his pecuniary means. Many persons maintain the negative, 
saying that a tenth part taken from a small income is a heavier 
burden than the same fraction deducted from one much larger; 
and on this is grounded the very popular scheme of what is 
called a graduated property tax, viz. an income tax in which the 
percentage rises with the amount of the income. 

On the best consideration I am able to give to this question, 
it appears to me that the portion of truth which the doctrine 
contains, arises principally from the difference between a tax 
which can be saved from luxuries, and one which trenches, in 
ever so small degree, upon the necessaries of life. To take a 
thousand a year from the possessor of ten thousand, would not 
deprive him of anything really conducive either to the support or 
to the comfort of existence; and if such would be the effect of 
taking £5 from one whose income is £50, the sacrifice required 
from the last is not only greater than, but entirely incommen- 
surable with, that imposed upon the first. The mode of adjusting 



TAXATION 15 

these inequalities of pressure which seems to be the most 
equitable, is that recommended by Bentham, of leaving a certain 
minimum of income, sufficient to provide the necessaries of 
life, untaxed. Suppose £50 a year to be sufficient to provide 
the number of persons ordinarily supported from a single 
income, with the requisites of life and health, and with protec- 
tion against habitual bodily suffering, but not with any indulgence. 
This then should be made the minimum, and incomes exceeding 
it should pay taxes not upon their whole amount, but upon the 
surplus. If the tax be 10 per cent, and income of £60 should be 
considered as a net income of £10, and charged with £1 a year, 
while an income of £1000 should be charged as one of £950. 
Each would then pay a fixed proportion, not of his whole means, 
but of his superfluities. An income not exceeding £50 should 
not be taxed at all, either directly or by taxes on necessaries; 
for as by supposition this is the smallest income which labour 
ought to be able to command, the government ought not to be 
a party to making it smaller. This arrangement however would 
constitute a reason, in addition to others which might be stated, 
for maintaining taxes on articles of luxury consumed by the 
poor. The immunity extended to the income required for 
necessaries, should depend on its being actually expended for 
that purpose; and the poor who, not having more than enough 
for necessaries, divert any part of it to indulgences, should like 
other people contribute their quota out of those indulgences to 
the expenses of the state. 

The exemption in favour of the small incomes should not, 
1 think, be stretched further than to the amount of income 
needful for life, health, and immunity from bodily pain. If 
£50 a year is sufficient (which may be doubted) for these 
purposes, an income of £100 a year would, as it seems to me, 
obtain all the relief it is entitled to, compared with one of £1000, 
by being taxed only on £50 of its amount. It may be said, 
indeed, that to take £100 from £1000 (even giving back £5) 
is a heavier impost than £1000 taken from £10,000 (giving back 
the same £5). But this doctrine seems to me too disputable 
altogether, and even if true at all, not true to a sufficient extent, 
to be made the foundation of any rule of taxation. Whether 
the person with £10,000 a year cares less for £1000 than the 
person with only £1000 a year cares for £100, and if so, how 



16 SELECTED ARTICLES 

much less, does not appear to me capable of being decided 
with the degree of certainty on which a legislator or a financier 
ought to act. 

Some, indeed, contend that the rule of proportional taxation 
bears harder upon the moderate than upon the large incomes, 
because the same proportional payment has more tendency in the 
former case than in the latter, to reduce the payer to a lower 
grade of social rank. The fact appears to me more than 
questionable. But even admitting it, I object to its being con- 
sidered incumbent on government to shape its course by such 
considerations, or to recognize the notion that social importance 
is or can be determined by amount of expenditure. Govern- 
ment ought to set an example of rating all things at their true 
value, and riches, therefore, at the worth, for comfort or 
pleasure, of the things which they will buy; and ought not to 
sanction the vulgarity of prizing them for the pitiful vanity 
of being known to possess them, or the paltry shame of being 
suspected to be without them, the presiding motives of three- 
fourths of the expenditure of the middle classes. The sacrifices 
of real comfort or indulgence which government requires, it is 
bound to apportion among all persons with as much equality as 
possible; but their sacrifices of the imaginary dignity dependent 
on expense, it may spare itself the trouble of estimating. 

Both in England and on the Continent a graduated property- 
tax (I'impot progressif) has been advocated, on the avowed 
ground that the state should use the instrument of taxation as 
a means of mitigating the inequalities of wealth. I am as 
desirous as any one, that means should be taken to diminish 
those inequalities, but not so as to relieve the prodigal at the 
expense of the prudent. To tax the larger incomes at a 
higher percentage than the smaller, is to lay a tax on industry 
and economy; to impose a penalty on people for having worked 
harder and saved more than their neighbors. It is not the 
fortunes which are earned, but those which are unearned, that 
it is for the public good to place under limitation. A just and 
wise legislation would abstain from holding out motives for 
dissipating rather than saving the earnings of honest exertion. 
Its impartiality between competitors would consist in endeavour- 
ing that they should all start fair, and not in hanging a weight 
upon the swift to diminish the distance between them and the 
slow. Many, indeed, fail with greater efforts than those with 



TAXATION 17 

which others succeed, not from difference of merits, but differ- 
ence of opportunities; but if all were done which it would be 
in the power of a good government to do, by instruction and by 
legislation, to diminish this inequality of opportunities, the 
differences of fortune arising from people's own earnings could 
not justly give umbrage. With respect to the large fortunes 
acquired by gift or inheritance, the power of bequeathing is 
one of those privileges of property which are fit subjects for 
regulation on grounds of general expediency; and I have already 
suggested, as the most eligible mode of restraining the accumu- 
lation of large fortunes in the hands of those who have not 
earned them by exertion, a limitation of the amount which any 
one person should be permitted to acquire by gift, bequest, or 
inheritance. Apart from this, and from the proposal of Ben- 
tham (also discussed in a former chapter) that collateral inher- 
itance ab intestato should cease, and the property escheat to the 
state, I conceive that inheritances and legacies, exceeding a 
certain amount, are highly proper subjects for taxation; and 
that the revenue from them should be as great as it can be 
made without giving rise to evasions, by donation inter vivos or 
concealment of property, such as it would be impossible 
adequately to check. The principle of graduation (as it is called) 
that is, of levying a larger percentage on a larger sum, though 
its application to general taxation would be in my opinion 
objectionable, seems to me both just and expedient as applied 
to legacy and inheritance duties. 

The objection to a graduated property tax applies in an 
aggravated degree to the proposition of an exclusive tax on 
what is called "realized property," that is, property not forming 
a part of any capital engaged in business, or rather in business 
under the superintendence of the owner ; as land, the public 
funds, money lent on mortgage, and shares (I presume) in 
joint stock companies. Except the proposal of applying a 
sponge to the national debt, no such palpable violation of common 
honesty has found sufficient support in this country, during the 
present generation, to be regarded as within the domain of 
discussion. It has not the palliation of a graduated property 
tax, that of laying the burden on those best able to bear it; 
for "realized property" includes the far larger portion of the 
provision made for those who are unable to work, and consists, 
in great part, of extremely small fractions. I can hardly con- 



i8 SELECTED ARTICLES 

ceive a more shameless pretension, than that the major part 
of the property of the country, that of merchants, manufacturers, 
farmers, and shopkeepers, should be exempted from its share 
of taxation; that these classes should only begin to pay their 
proportion after retiring from business, and if they never retire 
should be excused from it altogether. But even this does not 
give an adequate idea of the injustice of the proposition. The 
burden thus exclusively thrown on the owners of the smaller 
portion of the wealth of the community, would not even be a 
burden on that class of persons in perpetual succession, but 
would fall exclusively on those who happened to compose it 
when the tax was laid. As land and those particular securities 
would thenceforth yield a smaller net income, relatively to 
the general interest of capital and to the profits of trade; the 
balance would rectify itself by a permanent depreciation of 
those kinds of property. Future buyers would acquire land and 
securities at a reduction of price, equivalent to the peculiar tax, 
which tax they would, therefore, escape from paying; while 
the original possessors would remain burdened with it even 
after parting with the property, since they would have sold 
their land or securities at a loss of value equivalent to the fee- 
simple of the tax. Its imposition would thus be tantamount to 
the confiscation for public uses of a percentage of their property, 
equal to the percentage laid on their income by the tax. That 
such a proposition should find any favour, is a striking instance 
of the want of conscience in matters of taxation, resulting from 
the absence of any fixed principles in the public mind, and of 
any indication of a sense of justice on the subject in the general 
conduct of governments. Should the scheme ever enlist a large 
party in its support, the fact would indicate a laxity of pecuniarity 
integrity in national affairs, scarcely inferior to American 
repudiation. 

PRINCIPLES OF TAXATION 1 

Adam Smith proposed four maxims, or principles, "which," 
says Mr. Mill, "having been generally concurred in by subsequent 
writers, may be said to have become classical." A vast deal 
of importance has been assigned by English economists to these 
maxims. They have been quoted over and over again, as if 

iBy Francis A. Walker. Political Economy. [1888]. p. 488-505. 



TAXATION 19 

they contained truths of great moment; yet if one examines 
them, he finds them, at the best, trivial; while the first and 
most famous of these can not be subjected to the slightest test 
without going all to pieces. 

The Social Dividend Theory of Taxation 

"The subjects of every state," says Dr. Smith, "ought to 
contribute toward the support of the government as nearly as 
possible in proportion to their respective abilities; that is, in 
proportion to the revenue which they respectively enjoy under 
the protection of the state." 

This maxim, though it sounds fair, will not bear exami- 
nation. What mean those last words, "under the protection 
of the state"? They are either irrelevant, or else they mean 
that the protection enjoyed affords the measure of the duty 
to contribute. But the doctrine that the members of the com- 
munity ought to contribute in proportion to the benefits they 
derive from the protection of the state, or according as the 
services performed in their behalf cost less or cost more to the 
state, involves the grossest practical absurdities. Those who 
derive the greatest benefit from the protection of the state are 
the poor and the weak — women and children and the aged ; the 
infirm, the ignorant, the indigent. 

Even as among the well-to-do and wealthy classes of the 
community, does the protection enjoyed furnish a measure of 
the duty to contribute? If so, the richer the subject or citizen 
is, the less, proportionally, should he pay. A man who buys 
protection in large quantities should get it at wholesale prices, 
like the man who buys flour and meat by the car-load. More- 
over, it costs the state less to collect a given amount from 
one taxpayer than from many. 

Returning to the maxim of Dr. Smith, I ask, does it put for- 
ward ability to contribute, or protection enjoyed, as affording 
the true basis of taxation? Which? If both, on what principles 
and by what means are the two to be combined in practice? 

Taxation According to Ability 

But if we take the last six words as merely a half-conscious 
recognition of the social-dividend theory of taxation, and throw 
them aside, we shall still find this much-quoted maxim far from 
satisfactory: "The subjects of every state ought to contribute 
toward the support of the government as nearly as possible in 



20 SELECTED ARTICLES 

proportion to their respective abilities; that is, in proportion to 
the revenue which they respectively enjoy." 

But is the ability of two persons to contribute necessarily in 
proportion to their respective revenues? Take the case of 
the head of a family having an income of $500 a year, of which 
$400 is absolutely essential to the maintenance of himself and 
wife and children in health and strength to labor. Is the 
ability of such a person, who has only $100 which could possi- 
bly be taken for public uses, one-half as great as that of an- 
other head of a family similarly situated in all respects except 
that his income amounts to $1000, and who has therefore $600 
which could conceivably be brought under contribution? Mani- 
festly not. 

We shall, then, still further improve Dr. Smith's maxim if 
we cut away all after the first clause: "The subjects of every 
state ought to contribute toward the support of the government 
as nearly as possible in proportion to their respective abilities." 
The maxim as it stands is unexceptionable, but does not shed 
much light on the difficult question of assessment. 

The Leave-them-as-you-find-them Rule of Taxation 

The best statement I have met of the principle of contribution 
based on ability is contained in an article in the Edinburg Re- 
view of 1883: "No tax is a just tax unless it leaves individuals 
in the same relative condition in which it finds them." What 
does the precept, which we may call the leave-them-as-you-find- 
them rule of taxation, demand? In seeking an answer to this 
question, let us inquire, historically, what bases have been taken 
for assessment. Leaving out Rent-Bearing Land, whose fiscal 
relations have been sufficiently dwelt upon, we note four : 

1. Contribution has been exacted on the basis of Realized 
Wealth, commonly spoken of as Capital. 

2. On the basis of Annual Income, or Revenue. 

3. On the basis of Faculty, or native and acquired power of 
production. 

4. On the basis of Expenditure, or the individual consump- 
tion of wealth. 

These are the four historical bases of taxation. Let us see 
how far each in turn answers the requirement of the Edin- 
burgh Reviewer's maxim that the tax ought to leave the mem- 
bers of the community in the same relative condition in which 
it finds them. 



TAXATION 21 

And, first, of Realized Wealth. Wealth is accumulated by 
savings out of revenue. If, then, wealth alone is to be taxed, 
it is saving, not production, which contributes to the support 
of the state. Economically there can not be a moment's doubt 
that for government thus to draw its revenue from only that 
part of the produced wealth of the community which is reserved 
from immediate expenditure, must be prejudicial. The question 
also arises, where is the political or social justice of such a 
rule of contribution? // my income belongs to me, to spend 
for my own comfort and gratification, without any deduction 
for the uses of the state, why should I lose my right to any 
part of it because I save it? To tax realized wealth is to 
punish men for not consuming their earnings as they receive 
them. Yet it is eminently for the public interest that men 
should save of their means to increase the capital of the country. 

Revenue as the Basis of Taxation 

Turning to Revenue, it would seem, on the first thought, that 
we had reached a rule of equitable contribution. Yet the rule 
of contribution according to revenue is subject to grave impeach- 
ment. 

Here are two men of equal natural powers. One is active, 
energetic, industrious ; he toils early and late and realizes a 
considerable revenue, on a portion of which the state lays its 
hand. The other lets his natural powers run to waste ; trifles 
with life, lounges, hunts, fishes, gambles, and is content with 
a bare and mean subsistence. Was his duty to contribute to 
the support of the state different in kind or degree from that 
of the other? If not, how has his idleness, shiftlessness, worth- 
lessness, forfeited the state's right to a contribution from him in 
proportion to his abilities? 

We must, I think, conclude that, while to tax wealth instead 
of revenue is to put a premium upon self-indulgence in the 
expenditure of wealth for present enjoyment, to tax revenue 
instead of faculty is to put a premium upon self-indulgence in 
the form of indolence, the waste of opportunities, and the abuse 
of natural powers. 

Expenditure as the Basis of Taxation 

Passing, for the moment, by our third title, we find that the 
fourth basis taken for taxation has been Expenditure. This 



22, SELECTED ARTICLES 

must not be confounded with taxes on consumption, as con- 
stituting a part of a tax system in which taxes on realized 
wealth, taxes on revenue, taxes on faculty, one or all of these, 
also appear. Nor do we speak here of taxes on expenditure 
imposed in practical despair of an equitable distribution of the 
burdens of government. We are now concerned with expenditure 
only as the single basis of taxation, in the interest of political 
equity. 

"It is generally allowed," wrote Sir William Petty, two 
hundred years ago, "that men should contribute to the public 
charge but according to the share and interest they have in the 
public peace; that is, according to their estate or riches. 

"Now, there are two sorts of riches, one actual and the 
other potential. A man is actually and truly rich according 
to what he eateth, drinketh, weareth, or in any other way really 
and actually enjoyeth. Others are but potentially and imagina- 
tively rich, who, though they have power over much, make 
little use of it, these being rather stewards and exchangers for 
the other sort than owners' for themselves. 

"Concluding, therefore, that every man ought to contribute 
according to what he taketh to himself and actually enjoyeth, 
the first thing to be done is," etc., etc. 

Arthur Young seems to have had the same view. After 
saying that every individual should contribute in proportion 
to his ability, he added in a note : "By ability must not be 
understood either capital or income, but that superlucration, 
as Davenant called it, which melts into consumption." 

In this view, so far as any one possesses wealth in forms 
available for the future production of wealth, he is regarded 
as a trustee or guardian, in that respect and to that extent, of 
the public interests. Just this is said by Young — taxes "can 
reach with propriety the expenses of his living only. If they 
touch any other part of his expenditure, they, deprive him of 
those tools that are working the business of the state." 

Fallacy of this Doctrine 

I do not see but that, if capital, or revenue in excess of 
personal expenditure, is to be exempted from taxation, on the 
plea that it has not yet become the subject of individual and 
exclusive appropriation, and is, therefore, presumably held and 
used in a way which primarily benefits society, the state has the 



TAXATION 23 

right to inquire whether the use made or proposed to be made 
of wealth is such as will, in fact, benefit society, and benefit 
society, moreover, in the highest degree of which it is capable. 

The citizen says to the state, "You must not tax this wealth 
because I have not yet appropriated it exclusively to myself. 
Indeed, I am going to use it for the benefit of society." The 
state rejoins: "Yes, but of that we must satisfy ourselves. 
We must be the judge whether your use of your wealth will 
benefit society. Pay your taxes, and you can do with your 
wealth as you like. Claim exemption on the ground of public 
service, and you rightfully come under state supervision and 
control." 

The fallacy of the theory we are considering lies in the 
failure to recognize the fact that the selfish and exclusive 
appropriation and enjoyment of wealth are inseparable from 
its possession. The pride of ownership, the social distinction 
which attends great possessions, the power which wealth con- 
fers, are additional to the merely sensual enjoyment to be 
derived from personal expenditure. Would I resent the inter- 
ference of the government, or of my neighbors, in the manage- 
ment of my property, upon the ground that it was not being 
used in the best way? What is that resentment but the proof 
of a personal appropriation, an exclusive appropriation, of that 
wealth? My resentment would spring out of the deeply seated 
feeling that my management of my own property is my right : 
and that he who should deprive me of it would take from me 
what is as truly mine as the right to eat, drink, wear, or other- 
wise consume and enjoy any portion of it; that, short of absolute 
mental incapacity, it is my prerogative to control my own estate, 
even though not to the highest advantage of the community, or 
even of myself : though not wisely or well. In other words, I 
am not a trustee, but a proprietor. 

Dangerous Nature of This Doctrine 

This doctrine of the Trusteeship of Capital is not more 
irrational than it is socially dangerous. It is held by men who 
are fierce in denouncing graded taxation as confiscation ; yet it 
is, in its very essence, communistic. If the owner of wealth 
is but a trustee; if "his tools are working the business of the 
state," then the real beneficiary may enter and dispossess the 
trustee if any substantial reason for dissatisfaction as to the 



24 SELECTED ARTICLES 

management of the property exists; the state may take the 
tools into its own hands and "work its business" for itself. 

Faculty as the Basis of Taxation 

I reach, then, the conclusion that Faculty, the power of 
production, constitutes the only theoretically just basis of con- 
tribution; that men are bound to serve the state in the degree 
in which they have the ability to serve themselves. 

I think we shall more clearly see Faculty to be the true 
natural basis of taxation if we contemplate a primitive com- 
munity, where occupations are few, industries simple, realized 
wealth at a minimum, the members of the society nearly on a 
level, the wants of the state limited. Suppose, now, a work 
of general concern, perhaps of vital importance, requires to be 
constructed : a dyke against inundation, or a road, with occasional 
bridges, for communication with neighboring settlements. What 
would be the rule of contribution? Why, that all able-bodied 
persons should turn out and each man work according to his 
faculties, in the exact way in which he could be most useful. 

In regard to a community thus for the time engaged, we 
note two things : first, no man would be held to be exempt 
because he took no interest in the work; he would not be 
allowed to escape contribution because he was willing to relin- 
quish his share of the benefits to be derived, preferring to get 
a miserable subsistence for himself by hunting or fishing; 
second, between those working, a higher order of faculties, 
greater muscular power, or superior skill would make no dis- 
tinction as to the time for which the individuals of the com- 
munity should severally remain at work. 

The Ideal Tax 

This is the ideal tax. It is the form of contribution to which 
all primitive communities instinctively resort. It is the tax which 
but for purely practical difficulties, would afford a perfectly 
satisfactory measure of the obligation of every citizen to con- 
tribute to the sustentation and defense of the state. Any mode 
of taxation which departs in essence from this involves a greater 
or smaller sacrifice of the equities of contribution; and any 
mode of taxation which departs from this in form is almost 
certain to involve a greater or smaller departure in essence. 

And it deserves to be noted that the largest tax of modern 



TAXATION 25 

times, even in the most highly organized societies of Europe, 
the obligation of compulsory military service, is assessed and 
collected on precisely this principle. 

Faculty Tax Impracticable 

But while the tax on Faculty is the ideal tax, it has usually 
been deemed impracticable, as the sole tax, in a complicated 
condition of industrial society. As occupations multiply and 
the forms of production become diversified, the state can not to 
advantage call upon each member, by turns, to serve in person 
for a definite portion of each day or of the year. Hence modern 
statesmanship has invented taxes on expenditure, on revenue, 
on capital, not as theoretically just, but with a view to reduce 
the aggregate burden on the community, and to save production 
and trade from vexation and obstruction. 

We recur to the Tax on Revenue 

The politicians of the existing [1888] order, as we have seen, 
shrink from the effort involved in levying the public contribu- 
tions entirely, or even chiefly, according to faculty. Next in 
point of political equity comes the tax on incomes, or the revenues 
of individuals. That tax, as we now contemplate it, is a tax 
on the revenues of all classes, with exception only of the amount 
requisite for the maintenance of the laborer and his family, after 
the simplest possible manner, in health and strength to labor. 
It is not a compensatory tax, constituting a part of a system in 
which realized wealth and various forms of expenditure are 
also brought under contribution, but the sole tax imposed by 
the state. 

Exemption of the Actual Necessaries of Life 

It has been said that from such an income tax the necessary 
cost of subsistence must be exempted. Mr. D. A. Wells has, 
indeed, laid down two propositions : first, that "any income 
tax which permits of any exemption whatever is a graduated 
income tax ;" and second, that "a graduated income tax to 
the extent of its discrimination is an act of confiscation." But 
the exemption of a certain minimum annual revenue is a matter 
of sheer necessity, whether the state will or no. Economically 
speaking, it is not possible to tax an income of this class. A 
man in the receipt of such an income cannot contribute to the 



26 SELECTED ARTICLES 

expenses of government. Should the state, with one hand, take 
any thing from such a person as a taxpayer, it must, with the 
other, give it back to him as a pauper. 



THE PRINCIPLE OF APPORTIONMENT 1 

The question of apportionment of taxes leads to a con- 
sideration of the relative duty of citizens to pay for the sup- 
port of the state. The student is not left entirely to speculation 
respecting this subject. As has been already pointed out, it 
lies in the nature of a tax, and of the political conditions in. 
which taxation presents itself as an important public problem, 
that payments for support of the state should be equitable as 
between citizens. The principle of apportionment, therefore, 
according to which this duty is assigned, must recognize all 
those complex relationships which modern philosophy finds in 
the phrase political equity. 

Special Reasons for Equitable Apportionment 

No argument is needed to enforce the conviction that taxes 
should be apportioned on the basis of equity, but a few words 
may be added to render yet clearer the nature of this necessity. 
The power to tax is a sovereign power, and its exercise should 
be equitable for the same reason that every act of government 
should conform to what is fair and just. 2 Now that the personal 
sovereign is no longer a menace to the rights of the people, the 
importance of relative justice as between citizens is the strongest 
apology for popular government. This demand for equity, 
therefore, finds its ultimate sanction in the structure of the 
state itself, and when used in connection with taxation it is 
merely an application to a specific case of a fundamental concep- 
tion respecting popular government. 

It is possible, however, to discover a more commonplace 
reason for an equitable distribution of payments. Taxes are 
frequently spoken of as burdens, and there is no objection to 
such a use of language, provided the phrase is employed in 
the same sense as when speaking of any of the necessary items 
of expenditure in the domestic budget. If the payment of a 

»By Henry C. Adams. The Science of Finance, p. 321-32. 
2 The student of course recognizes this as coming from Mill. 



TAXATION 27 

coal bill or the quarter's rent be a burden, then is the payment 
of a tax a burden. Using the phrase in this sense it is clear 
that the payment of any definite amount, the various expect- 
ations from life due to a customary standard of living being 
for the moment dropped from view, is felt to be a burden in 
proportion to the size of the fund from which it is made. The 
burden of a payment is measured by what is left after the 
payment, rather than by the amount paid. It is the surplus 
over the necessary expenditures of life which minister to the 
developing, and therefore the most keenly sensitive, wants. 
This is the explanation of the universal opinion that where 
fortunes vary equal payments would not be equitable as between 
citizens; and the commonplace argument for equity in matters 
of taxation, to which reference was made, rests upon the assump- 
tion that the relief to him who fails to pay his just share is 
not as great as the burden which this relief imposes on some 
other member of the community who on this account pays 
more. Equity in the apportionment of taxes, therefore, reduces 
the burden for the support of the State to its minimum, just 
as a scientific adjustment of straps and buckles by which a knap- 
sack is slung to a soldier's back makes the load carried as though 
it were light. 1 It thus appears that a just system of taxation 
is equivalent to economy of social energy, from which it fol- 
lows that the principle according to which taxes are appor- 
tioned may have a very direct bearing upon the rate of social 
development. 

The above thought may be pressed yet a step further by 
showing more specifically how equity in the levy of taxes bears 
upon the development of a nation's industries. A payment 
of any sort works its way into industrial conduct through the 
incentives to industry resulting from the satisfaction which 
follows the payment in question. The labour which will be 
undertaken in the future depends in large measure upon the 
degree of satisfaction resulting from the labour of the past. 
This, tempered, perhaps, by the instinctive hopefulness of 
mankind, is the fundamental law of industrial conduct. Is 
it not, then, clear that an inequitable apportionment of taxes, 
which deprives him who pays too much of more satisfaction 
in the expenditure of his income than it adds to that of him 
who pays too little, results in weakening the aggregate of 

1 A common simile of German writers. 



28 SELECTED ARTICLES 

the motives to industrial activity? Thus the universal ex- 
perience of nations, that one of the surest ways to encourage 
industry is to adjust the fiscal system to the demands of equity 
as between citizens, finds upon analysis a psychological basis. 

There are, then, three reasons why equity should control 
apportionment. It is demanded by the accepted governmental 
principles of free states; it is essential to the economy of social 
energy; and it is important as a means of presenting motives 
to industry in the most effective manner. 

Analysis of the Rules of Apportionment 

It is one thing to conclude that equity should give character 
to apportionment; it is quite another to discover an intelligent 
and at the same a workable rule for the attainment of this end. 
Some progress in this direction was made when considering the 
theorist's definition of a tax, since it was there shown that a 
tax could be considered neither as the price charged for public 
service nor as an equivalent paid for value received. On the 
other hand, it was concluded that a tax is a contribution to a 
common fund designed for a common end. Manifestly, the 
principle of apportionment adopted will ally itself to the accepted 
conception of a tax; and we might, therefore, in strict logic, 
proceed at once to inquire what theory of apportionment is 
bound up in the statement that a tax is a contribution. This, 
however, would exclude certain considerations capable of throw- 
ing considerable light upon a difficult problem. It would also 
result in an opinion arrived at from theory alone, ignoring 
those practical considerations which so largely control in matters 
of finance, and which do not present themselves until one begins 
to trace the consequences that follow the application of the prin- 
ciples adopted. 

Apportionment and the Cost Theory of Taxation 

A moment's consideration is adequate to show that the duty 
to pay for the support of the state cannot be assigned to citizens 
according to the cost to government of the service rendered. 
The fact that this cost cannot be specialized is of itself final 
against such a rule. Protection, for example, consists in creating 
and maintaining a condition of security in society, and its cost 
cannot be divided up and parcelled out. The law undertakes 
to arrest and punish every criminal, no matter what the cost 



TAXATION 29 

may be, neither as an act of retribution nor to enable him who 
suffered the wrong to enjoy revenge, but because every mis- 
carriage of the law tends to destroy the conditions under which 
life is secure. "The value of government to any man is pro- 
portioned to the completeness of the protection it extends to all 
men. If it undertook to protect only those who contribute to 
its cost, it would thereby breed lawlessness and invite anarchy." 1 

The error underlying the rule that taxes should be appor- 
tioned to cost is further shown by applying it to the protection 
of property. All property is not of the same sort in that its 
protection does not occasion the same expenditure. More 
litigation, for example, arises respecting property that exists 
in the form of a patent privilege, a franchise, or any sort of a 
grant whatever, than is the case respecting property open for 
investment to all who possess free capital. The state could 
not, however, on this account impose heavier burdens upon it 
than upon ordinary property. A better illustration may be given : 
security of property depends in large measure upon the enlight- 
ened self-interest and moral sense of the community in which it 
exists. Where the grade of intelligence is low the cost of 
protection is high; where the grade of intelligence is high the 
cost of protection is low; but, provided two such communities 
have intercourse with each other, it is of as much importance to 
the community where property is secure that property be pro- 
tected in the community where it is exposed to danger, as that 
its own property should be guarded. Here, again, as in the 
case of protection to life and limb, the end of government is 
to maintain a condition of security, and it is easy to see that 
the protection of property on the borderland of attack is essen- 
tial to the security of that which on account of its situation 
is relatively less exposed. The rule of apportioning taxes 
according to cost is not capable of realization. 

Moreover, the theory on which it rests fails to harmonize 
with one's ideas of equity and justice as between different 
classes of property differently located. It is not fair that 
property which already carries a burden on account of the fact 
that from its nature or condition it is insecure should be 
imposed with unusual taxes, when its protection is essential to 
the security of all property in the community. To apply the 

1 By Cooley. Principles That Should Govern in the Framing of Tax 
Laws. p. 5. 



30 SELECTED ARTICLES 

principle of cost in the levy of taxes would be to call for heavy 
payments from the weak in order to render small the payments 
from the strong; and since the payment is a coerced and not a 
voluntary payment, such an assignment of the duty to support 
the state cannot be regarded as equitable employment of public 
authority. 

No government, so far as the writer is aware, undertakes 
to apply strictly the rule of apportionment now under con- 
sideration. But there are many instances in which the prin- 
ciple of cost is permitted to shape in a very marked degree 
financial policy. Indeed, a survey of the taxing system of 
modern states offer some warrant for the generalization that 
according as a people has emerged from feudalism at a remote 
or recent date, so will be the extent to which taxes are appor- 
tioned on the basis of cost. In England at least, where feudalism 
was abandoned in the sixteenth century, very little is known 
of the specialization of public services; while German peoples, 
from whose administrative regime the influence of feudalism 
has not yet passed away, consciously recognize the rule that 
payment for the support of the state should be adjusted to cost. 
The classifications of service which permits the theory of 
specialization to be realized are both interesting and instructive. 
The one here given is taken from the Austrian writer, von Hock. 
According to von Hock the services of the state are regarded as 
embraced under three classes, as follows : 

First. Every one who acknowledges himself as a loyal sub- 
ject of the government enjoys from the state protection of 
person, the care of the state for safety, and for the preserva- 
tion of general order, for cleanliness, and freedom from 
disease; he enjoys also the dignity and sense of importance 
which comes with the strength and reputation of a nation, 
and avails himself also of the privilege of carrying on an 
industry, trade, or profession within the state which would 
not be possible except the state exists. These and other like 
services are personal and direct. They are rendered to rich 
and poor alike, and should on this account be made the basis 
of the personal tax. 

Second. Whoever has possessions in a state and invests 
his property in an industrial calling enjoys the protection of 
the state for his property and his industry; the courts enforce 
legitimate contracts and guard him against all fraudulent 



TAXATION 31 

procedures; he enjoys the advance in the value of property that 
accrues on account of the growth of society; or, without further 
specification, reducing all these services to a common basis, each 
citizen enjoys a given income under the protection of the state 
and in part because the state exists. This class of services is 
made the basis of the income or property tax. 

Third. In addition to the above there are a large number 
of special and peculiar services which the state renders to 
individuals. Public education, the building of highways, the 
transmission of news, the conferring of honours, the recording 
of mortgages, and the like, are illustrations of the services in 
question. Being special in their character, they should, according 
to the purchase theory of taxation, be made the basis of a special 
payment. x 

Should one insist on proceding from the quid pro quo 
theory of taxation he probably could not find a better classi- 
fication of public services for that purpose ; a good classification, 
however, does not set aside the errors in theory or the diffi- 
culties in administration incident to this conception of taxation. 

Apportionment and the Benefit Theory of Taxation 

It has also been the claim of many writers that taxes should 
be apportioned on the basis of the value of services to citizens. 
This is the principle of apportionment corresponding to the 
benefit theory of a tax. Among the practical results of an 
attempt to apply the value theory of apportionment would 
be the imposition of excessive taxes upon those who are least 
able to support them. It is undoubtedly true that the guar- 
dianship of a just government is appreciated most intensely 
by those who are least capable of protecting themselves. As 
stated by President Walker, "those who derive the greatest 
benefit from the protection of the State are the poor and the 
weak — women and children, and the aged ; the infirm, the 
ignorant, the indigent." 2 Not only is this true of the original 
and fundamental functions of government, that is to say, the 
protection of life and property, but it is equally true, indeed 
in a more marked degree true, of the higher activities of later 
appearance, such as education, recreation, guardianship against 
the deteriorating influence of unregulated competition, and the 

1 Die oeffentlichen Abgaben und Schulden. p. 15-16. 

2 Political Economy, p. 490. 



32 SELECTED ARTICLES 

like. It thus becomes clear that to apply the principle that taxes 
should be paid in proportion to the value of service would de- 
stroy the conditions which alone justified the state in undertaking 
the service in the first place. If taxes for the support of schools, 
for example, should be levied to citizens in proportion to 
the value to them respectively of the public-school system, as 
estimated by citizens of varying incomes, no sound reason could 
be urged why the state should undertake to provide public 
schools at all. It is because the education which the rich will 
naturally provide for their children may, with a very slight 
addition to the cost, be made the common possession of all 
classes that the state assumes the support of schools. It may 
be urged that the poor should pay for the increment of cost 
arising from the extension of facilities for instruction; but to 
call upon them for payment in proportion to their estimate of 
the value to them of a system of free schools is a reductio ad 
absurdum. It would cause the schools to disappear, yet this 
is what the benefit theory of taxation logically applied would 
lead to. 

The theory of apportionment now claiming attention will 
be recognized as unsound if, in addition to noting its practical 
results, one observes that it calls for an estimate of what is 
beyond estimate or for which there is no comparative basis of 
estimate. Government is essential to civilized existence and 
there is, therefore, no basis for calculating the value of the 
services which it renders. "If government," says Judge Cooley, 
"were something to be taken up or dispensed with at the option 
of individuals, that method of estimation would take on a 
different appearance ; but when the existence of a government 
in some form is confessedly something always to be assumed, 
it is clear that there can be no basis for an estimate of its value 
as compared with that condition of things in which there should 
be no government at all. It is true that if a theory valuable for 
practical application can be deduced from any imaginary state 
of things, there is no reason in the baselessness of the assumed 
facts to preclude our availing ourselves of it. The theory that 
government is founded in contract may answer a good purpose, 
though historically it is baseless. But so long as it is impossible 
to estimate the relative value of government to person and 
property, and impossible to collect taxes according to it if the 
estimate were practicable, it is manifest that any theory of 



TAXATION 33 

taxation drawn from an impossible comparison of a state of 
society under settled government with an imaginary state of 
things when no government exists must be absolutely without 
practical value." x 

Apportionment and the Contributory Theory of Taxation 

It is hoped that the foregoing considerations have served to 
impress upon the reader the conception of solidarity in modern 
society, and of common interests which do not admit of segrega- 
tion either as a cost to the government or a value to the citizen ; 
for it is under the influence of this conception that the true 
theory of apportionment must be developed. A tax is a contribu- 
tion from private funds to the public purse, and the principle 
according to which the government should determine for each 
the amount of his contribution is found in the expression that 
each citizen should pay for the support of the state in proportion 
to his ability as compared with the ability of others. 

Should one ask why ability is accepted as the basis of 
apportionment, perhaps the most satisfactory reply would be 
that it approves itself to the moral sense of men in all cases 
where common expenditures are met by means of contributions. 
A church, for example, in which the sense of duty in the matter 
of payments is more highly developed than in any other voluntary 
association holds it as a common law of religious sentiment 
that the rich member should pay more for common ends than 
the poor member; and the measure of his greater payment is his 
ability, all things considered, to bear the payment. This is the 
New Testament doctrine of service, and its acceptance as a 
canon of taxation shows that the modern science of finance 
recognizes one of the fundamental principles of Christian ethics. 
Not alone in the church is this rule of service recognized, but 
in all voluntary associations, whether temporary or permanent, 
it is admitted as a principle of action, provided only the asso- 
ciation acknowledges a solidarity in the interests of its mem- 
bers. 2 It may, then, be asserted without further comment that 

1 By Cooley. Principles that should Govern in the Framing of Tax 
Laws. p. 4. 

2 A club with annual fees does not commonly realize solidarity of 
interest. Should this however be the case in some particular instance, 
a club would still have no need to recognize ability of members in se- 
curing means for pecuniary support, since its members are all of the 
same class and consequently equal payment for club expenses becomes 
equitable payment as between club members 



34 SELECTED ARTICLES 

the rule of apportionment which calls for the levy of taxes 
according to the ability of citizens to pay finds its sanction in 
the moral sense of the community, and this in all matters of 
social rights and social duties must be accepted as final. 

The inquiry may perhaps be raised, in view of the fact 
that the contributory theory of a tax was not granted approval 
until comparatively recent times, whether modern peoples are 
influenced by finer conceptions of justice and equity than was the 
case in the past. This may possibly be true, but the acceptance 
of the principle that taxes should be levied according to ability, 
in place of the "cost" or the "benefit" theory of apportionment, 
does not prove it to be true; inasmuch as a consideration of the 
social and industrial conditions under which these abandoned 
theories were held will show that they were capable at the time 
of securing substantial justice as between citizens. 

Consider, for example, the rule upon which the colonial 
taxation of Massachusetts rested. "Every man's life," it was 
asserted, "is equally dear to him, and every man should pay 
equally for its protection; every man's property is equally dear 
to him, and every man should pay for its protection in propor- 
tion to its amount." The society which this rule held in view 
was early New England society, and the time the last part 
of the last century. There was at this time a rough equality in 
respect to property as well as social status, and on this account 
the principle of apportionment to which Massachusetts states- 
men gave their approval would lead to payment for the support 
of the State in proportion to ability. The same rule applied at 
the present time would not result in adjusting the burden of 
taxation in proportion to the relative ability of citizens. It is 
the new social and industrial conditions which make it necessary 
to abandon the "cost" and the "value" theories of apportionment, 
and not the development of a finer sense of justice among men. 
It is true that a higher phase of social ethics is in process of 
evolution, and that the necessity of giving expression to the 
contributory theory of taxation is one of the results of that 
evolution, but to claim that payment for the support of the 
state in proportion to ability is a newly developed moral concept 
would be to cast suspicion upon the rule of apportionment 
for which we are now contending. It is much more convincing 
to say— what, indeed, is true— that the equity of the rule that 
taxes should be paid in proportion to ability has been universally 



TAXATION 35 

approved by the moral sense of mankind, but that never until 
recently has there been any need for the formal expression of 
the rule as the basis of apportionment. It is the complex 
character of modern industry, its stratification along the line 
of property rights, and the great disparity of riches, which 
brings into prominence the principle that taxes should be paid 
according to ability. Not only, therefore, does this theory of 
apportionment rest upon the moral sense of the community as 
it now exists, but it appeals for support to the conscience of the 
past. The first struggle which arose respecting taxation was to 
establish the rule that all men should pay something ; the question 
of the present is to devise a system by which men may be made 
to pay according to their abilities. 

One further thought may be expressed with regard to the 
principle of apportionment now under consideration. It finds 
an added sanction in the fact that it is the complement of the 
theory of distribution which both individualistic and socialistic 
economic philosophy recognizes as just and equitable. Commun- 
ists assert that product should be distributed according to need; 
all other schools of writers claim that product should be dis- 
tributed according to efficiency. If, now, the product of the 
industrial organization is to be distributed according to efficiency, 
what is more natural than that the payment for the support of 
the state, which alone renders industrial association possible, 
should be made according to ability? The financial principle 
of apportionment according to ability is thus observed to be 
the counterpart of the economic principle of distribution accord- 
ing to efficiency. Whether or not the financial principle would 
fall were the economic principle to be abandoned need not here 
be discussed; it is sufficient to notice the close connection which 
exists between the principle of public and of private economy, 
and to recognize that each receives a presumption in its favour 
from the acceptance of the other. 

It is believed that the above considerations warrant the 
conclusion that equity in taxation means the assignment to 
citizens of their duty to support the state in proportion to 
their respective abilities. This is by no means a simple con- 
ception, as will be shown by the analysis which follows, which 
has for its purpose to discover in what manner the ability of 
the citizens to pay for the support of the state may be deter- 
mined. The point at issue in this analysis is the following: 



36 SELECTED ARTICLES 

Is ability measured by the amount of property a man possesses 
or the income he enjoys, or does it increase at a rate more 
rapid than the increase in his property or his income? Does 
payment • according to ability demand the acceptance of the 
proportional or of the progressive principle in the apportionment 
of taxes? The modern tendency, as shown by tax reforms 
during the past twenty years, is toward greater reliance on the 
progressive principle ; 1 that, however, does not prove the principle 
to be a sound one, although it may raise a presumption in its 
favour. The question as thus presented calls for careful 
analysis. 

THE FUNDAMENTAL PROBLEMS 2 

Amid the clashing of divergent interests and the endeavor 
of each social class to roll off the burden of taxation on some 
other class, we discern the slow and laborious growth of 
standards of justice in taxation, and the attempt on the part 
of the community as a whole to realize this justice. The 
history of finance, in other words, shows the evolution of the 
principle of faculty or ability to pay — the principle that each 
individual should be held to help the state in proportion to his 
ability to help himself. 

Premising a general acquaintance with the main lines of 
fiscal evolution, what interests us here is the tracing of the 
fundamental ideas on which the evolution was based. In other 
words, taking it for granted — what indeed cannot fail to be 
granted, after a study of the facts — that there has been a pro- 
gressive attempt to realize the demands of fiscal justice and a 
more or less unconscious tendency to work out the principle of 
ability to pay, the question presents itself as to what are the 
historic forms of the test of this ability. Granted that in some 
more or less rough way an endeavor is made, almost from the 
beginning, to apportion public burdens in accordance with the 
presumed capacity of individuals or classes, the problem arises 
as to how the capacity to bear this burden is to be measured. 
Even where it is difficult to recognize any conscious attempt 

1 Seligman's chapter on "Recent Reforms in Taxation" in Essays in 
Taxation. 

2 By Edwin R. A. Seligman. The Income Tax. p. 4-18. 



TAXATION 2>7 

on the part of government to carry this principle into practice, 
and even where actual fiscal institutions represent more or less 
thinly disguised efforts of the dominant economic class to roll 
the burdens on the shoulders of the weak, — even here it is rare 
to find a cynical disregard of all consideration of equity; and 
even here a more or less successful effort is made to clothe the 
hard facts of economic oppression in the garb of some specious 
explanation. Thus, whether it be actually realized or not, it is 
possible to interpret the successive stages of fiscal development 
in terms of an attempt to enforce various criteria of ability to 
pay. 

From this point of view, namely that of the norm or test of 
faculty, it may be said that no less than five answers have been 
given in the course of history. At the outset, the individual as 
such was selected as the norm. Mere numbers suffice in primitive 
society to answer the requirements of justice. Thus it is that 
everywhere the beginnings of direct taxation take the form of 
the poll or capitation tax. In a primitive community where 
private property has but slightly developed or where the differ- 
entiation in economic conditions is insignificant, where there 
are no very rich and no very poor, where every man works and 
where individual revenue is derived almost exclusively from 
individual exertion, it is indeed true that polls form an approx- 
imately satisfactory test of ability in taxation. Wherever we 
have primitive economic and democratic conditions, whether it 
be in the early stages of Teutonic civilization or in the begin- 
nings of Puritan New England, we find that the poll tax forms 
an essential ingredient of the fiscal system. 

With the development of private property, however, and 
with the differentiation of economic classes, a change sets in. 
The original equality of wealth is followed by an inequality 
of possessions. The distribution of ownership, in other words, 
is now gradually divorced from the mere accumulation of 
numbers. A poll tax responds less and less well to the demands 
of faculty until it finally becomes, at all events as the sole test 
of ability, almost wholly a mockery. Efforts may indeed be 
made to improve the situation for a time by graduating the poll 
tax according to outward signs so that the poll tax in some 
cases becomes a class tax, the assessment being graded roughly 
in accordance with the social position of the individual. But 



38 SELECTED ARTICLES 

this class or classified poll tax, as we find it in the early Middle 
Ages, is only a makeshift, and before long the poll tax is 
either supplemented or supplanted by a property tax. 

Property as the Test of Faculty 

. In this second stage of development, property is accepted 
as the test of faculty in taxation. For many centuries it forms 
an admirable test. Amid the rude conditions of ownership 
that we find at this stage of economic life, private property 
consists very largely of land and of appurtenances to land, so 
that the property tax is virtually a tax on real estate. Gradually, 
as primitive industry and commerce develop, various forms of 
personal property come into prominence and are added to the 
tax lists, until finally the two elements are fused together in 
order to form the general property tax, which is universally 
found in this sage of economic development. Property becomes 
the only possible general test of faculty in taxation because it 
is the specific mark of distinction between classes and between 
individuals within each class. At first the property tax is shyly 
and cautiously added to the poll tax, as an unimportant feature 
of the system; then the property tax grows in significance while 
the poll tax slowly recedes; until finally the poll tax disappears 
and the property tax remains in possession of the field. The 
general property tax is found wherever a primitive democracy 
is accomplished by a moderate agricultural and commercial 
development. 

For a long time the general property tax functions satisfac- 
torily and responds fairly well to the canons of justice in tax- 
ation. But in the inevitable course of economic development, 
with the growing differentiation of economic classes and with 
the increasing complexity of economic life, certain difficulties 
make themselves felt, not only in the practical application of 
the system but also in the theoretical basis of the tax. With 
the practical difficulties of the system, this is not the place to 
deal. The causes of the breakdown of the general property 
tax and the reasons why it everywhere disappeared in the later 
Middle Ages in Europe and why it is beginning to disappear 
in its last stronghold— the United States— have been sufficiently 
expounded elsewhere. 1 What interests us in this place is the 

1 See Seligman. Essays in Taxation. Chap. II. 



TAXATION 39 

theoretical shortcomings of property as a test of faculty in 
taxation. 

These shortcomings may be summarized as follows: In the 
first place, a gap often discloses itself between property and 
product. It is indeed true that in the long run the value of 
a piece of property stands in a close relation to its yield. To 
use a modern phrase that has become familiar, capital is 
nothing but capitalized income. That is to say, what a piece 
of property will fetch in the market represents nothing but 
a capitalization of its present and prospective yield. While 
this is, however, true in the long run, it is not true in the short 
run. The value of a piece of property may bear only a slight 
relation, or no relation at all, to the yield of that property in 
any particular year, or even for a term of years. Two farmers 
may possess homesteads of equal value. The one may have 
bad luck and suffer drought or inundation, while the other may 
enjoy a bountiful harvest. With property as a test of faculty, 
the two farmers will pay the same, although the produce of their 
farms may differ enormously. Again, of two house owners 
desiring to rent their property, one may succeed and the other 
may fail for the year, or for a term of years. Although the 
unsuccessful owner has no income, he must, with property as 
the test of faculty, pay the same amount as the other. Instances 
might be multiplied, all tending to show that property and 
product may frequently diverge. 

In the second place, a distinction is gradually observable 
between property incomes and labor incomes. In the early 
stages of the development, where property owners bear the 
greater part of the public burdens, the man who has no prop- 
erty either is reached by the poll tax, or is of such slight 
taxable capacity that he is entirely omitted. In modern times, 
however, with the growth of lucrative professions and with 
the great opportunities for rich salaried positions, labor incomes 
assume an importance which did not exist in earlier times. It 
may well be granted that the recipient of a modest salary should 
be put on a different plane from the individual who receives a 
like income from invested property ; but that is a different thing 
from claiming that lawyers or doctors or engineers or railway 
presidents with salaries or professional earnings of from $25,000 
to $100,000 a year should not be called upon to contribute at all 



40 SELECTED ARTICLES 

to the public charges. The acceptance of property as the sole 
test of ability to pay would result in a complete exemption of 
such classes, and would give rise to countless well-founded 
complaints: 

In the third place, the recognition of property as the test 
of ability to pay raises a difficulty connected with indebtedness. 
There is a well-defined distinction between the legal and the 
economic conceptions of property. By property in the legal 
sense is meant the ownership of individuals in things or in 
rights to things, irrespective of the ulterior division of the 
produce of the property. By property in the economic sense — 
usually denominated wealth — is meant the control of the services 
of the thing possessed. If a part of the services or produce 
has to be handed over by the individual to some one else, it 
does not really form a part of his wealth. The owner of a 
$10,000 farm who has mortgaged it for $5,000 possesses wealth, 
or property in the economic sense, to the extent of $5,000. That 
wealth represents the amount that he is worth. His debts are 
a part not of his assets, but of his liabilities, and must be de- 
ducted from the assets in order to strike a correct balance 
sheet. Legally, however, — at all events under the modern law 
of mortgage — his property amounts to $10,000. If the govern- 
ment, as is usually the case, looks at the piece of property 
rather than at the individual condition of the property owner, 
it will assess the taxpayer on the full $10,000. In other words, 
in a property tax the expenses incurred in maintaining the 
property are ordinarily not considered. 

This insistence upon the legal rather than the economic 
conception of property dates from the period when virtually 
all existing credit consisted of consumption credit rather than 
production credit and when indebtedness played a very small 
role in the social economy. In modern times, however, credit 
has become the very basis of business enterprise. Under these 
circumstances the problem of indebtedness assumes a new 
significance. It was but natural, therefore, that the property 
tax, where it still existed, should take some account of this 
new condition and should endeavor to make allowance for debts. 
But experience soon showed that this attempt was fraught with 
great practical difficulties. As we have seen in the United States, 
the creation of fictitious debts became such a paying investment 
that most of the states which introduced the system were com- 



TAXATION 41 

pelled again to abolish it. As a consequence, some states today 
deduct mortgage debts from real estate; others deduct general 
indebtedness from personal estate; a few permit deduction for 
indebtedness in general; while most of the states allow either 
for no deduction at all, or for deduction in only personal or 
real estate. Such a situation is bound to be unsatisfactory. 

In the fourth place, property as a test of faculty fails to draw 
the correct distinction between the constituent elements of 
wealth. In former times, when property was scanty and almost 
entirely used for productive purposes, the situation was simple. 
But in modern times a sharp line must be drawn between 
consumption property and productive capital, between property 
utilized primarily for purposes of enjoyment and property utilized 
for the securing of a money income. Take as an example of 
the first case a private library or art gallery or park which, 
instead of being the source of a money income, is really the 
occasion of a distinct expenditure. To put such things on the 
same footing as property which yields a money income is, to 
say the least, a procedure open to grave doubt. To tax property 
as a unit, irrespective of the kind of property or the income 
from the property or the outlay connected with the property, 
becomes in modern times a source of increasing embarrassment. 

Finally, in the fifth place, the history of the general prop- 
erty tax has everywhere shown that there seem to be insuper- 
able difficulties in reaching the multifold forms of wealth in 
a developed industrial society. It is everywhere conceded that 
universality of taxation is one of the leading fiscal principles; 
yet the growing difficulties of reaching all the different forms 
of property inevitably lead to the escape of some and to the 
over-assessment of others. The theory of the general prop- 
erty tax originally rested on the assumption that fiscal equality 
could be reached by taxing all individuals on their visible 
property. When the mass of property split up, and the myriad 
forms of modern intangible personalty disclosed themselves, 
the basis of the theory was undermined by the new conditions, 
and instead of equal and universal taxation there was now 
developed a system of partial and unequal taxation. 

If we keep in mind these five different kinds of complica- 
tion, we shall be able to comprehend how it was that slowly 
but surely property came to be regarded as a less and less 
satisfactory form of taxation, and we shall not be surprised 



42 SELECTED ARTICLES 

to learn that it was gradually replaced by other tests of ability 
to pay. 

Expenditure and Product as Tests of Faculty 

The next step in the development was the selection of 
expenditure as the criterion of faculty. Expenditure was first 
advanced as the best test of ability to pay toward the close of 
the Middle Ages. The great tax reformers of the sixteenth and 
seventeenth centuries, like Bodin, Hobbes and Petty, were 
influenced chiefly by the last argument. The general property 
tax had everywhere become a mere travesty of justice, and the 
system was honeycombed by abuses which seemed to be entirely 
ineradicable. To attain a system of taxation which no one 
could escape became the watchword of the tax reformers. Since 
every man, rich or poor, necessarily incurs expenditures, a 
system of taxes on expenditure was now advocated. This took 
the form of both direct and indirect taxes on consumption, as 
well as of taxes on trade and business which were supposed 
ultimately to reach the consumer. Indirect taxes on trade and 
commerce had indeed arisen, at a comparatively early period, 
as a development out of the mediaeval system of fees and tolls. 
But now, in the sixteenth, seventeenth and eighteenth centuries, 
every European country witnessed the growth of a system of 
excises or expenditure taxes, which grew in importance as the 
old general property tax dwindled. The general excise or the 
single excise became the ideal of the publicists, and was in a 
fair way of being realized in practice. 

While, however, consumption taxes succeeded in avoiding 
some of the worst abuses of the general tax, it was not long 
before this system in turn disclosed difficulties in its operation. 
If the rich man stood from under in the general property tax, 
it was largely because the rich man's property could not be 
reached. With the development of expenditure as the test of 
faculty, however, it was inevitable that the rich man should 
again escape his share, because of the disparity between expend- 
iture and revenue in the different social classes. The lower 
we go in the economic scale, the greater is the lack of equi- 
librium between revenue and expenditure. At the bottom of 
the scale are those whose incomes only barely suffice for their 
living, while at the top of the scale are those whose expenditures, 
no matter how large, are but a fraction of their revenue. In 



TAXATION 43 

the one case there is absolutely no surplus available; in the 
other the surplus is many times greater than the expenditure. 
Necessarily, under such a system, a tax on expenditure becomes 
an increasingly heavy burden on the least wealthy classes. It 
is for this reason that we can explain the comparatively slight 
resistance to the adoption of the excise system throughout 
Europe at a time when political life was still controlled by the 
aristocracy of land or of moneyed capital. But it is evident 
that with the growth of democracy in more recent times a system 
of taxation which inevitably results in undue burdens on the 
less fortunate members of society was destined to become unpop- 
ular and to pass away. Expenditure becomes an unsatisfac- 
tory test of ability to pay, not only because it puts a premium 
on the penurious rich man, but because it imposes a crushing 
burden upon the average poor man. One of the first efforts 
of the French Revolution was to abolish not only the remains 
of the taille, or general property tax, but also the whole exist- 
ing system of taxes on consumption ; and the history of the 
nineteenth century in every progressive country has been the 
history of the attempt to reduce the burden of the excise taxes 
so far as they are still liable to the objections mentioned above. 
As a consequence, expenditure has been virtually abandoned as 
the sole test of faculty. 

The next stage in the development is represented by the 
adoption of product or produce as the norm of taxation. We 
have learned of the shortcomings of property as the test of 
justice, and we have seen that the adoption of expenditure 
in lieu of property was supposed to meet the objections of 
lack of universality. With the failure of this system, how- 
ever, tax reformers and progressive governments reverted to 
some of the other defects of the property tax, such as the dis- 
crepancy between the value and the yield of the property, and 
the inequality of the tax due to the escape of the property 
owner. It was reasoned — and with considerable force — that if 
recourse were taken to the produce of the property rather than 
to the property itself, several results would be achieved. In 
the first place, a man would be taxed only upon what he actually 
received, and the hardships of payment without revenue would, 
at once, be avoided; while secondly, and still more important, 
the tax, instead of being assessed on the whole of the property, 
and thus being subject to the abuses either of inquisitorial 



44 SELECTED ARTICLES 

assessment or of illegitimate evasion, would be levied directly 
on the produce of the thing itself, which yielded a return. 
Property would be split up into its constituent elements, and 
the tax would be levied on the yield of each. Thus the tax 
would be levied on the produce of a piece of land, irrespective 
of who owned the land; the yield of the land was to be ascer- 
tained by a careful process, and if the taxes were not paid by 
some one, the land would be sold. In the same way as the rental 
of a dwelling was easily ascertainable, the house tax was now 
imposed upon the dwellings when they were actually rented, 
and only then, and if the tax were not paid by some one, 
the house was sold. So a business was conceived of as an 
entity, the product of which was to be measured by outward 
signs, such as the location of the business, the number of the 
clerks, etc., and the tax was imposed upon the business itself 
A similar method was pursued with the other forms of property. 

Thus there developed during the seventeenth, the eighteenth 
and the first half of the nineteenth century, a system of taxes 
on things rather than on persons, or a system of taxes on the 
product of the property rather than on the person of the 
property owner. This is the system which became known 
in France under the name of real taxes (taxes reelles) as 
opposed to the old personal taxes (taxes personnelles), and 
which Avas termed in Germany Extragssteuern as opposed to 
the old Vermogenssteuern. In France it was the work of the 
Revolution which created a system of real taxes ; in Germany 
and the other continental countries the movement had begun 
earlier and was completed somewhat later. In England, also, 
the same system developed, being composed, at the end of the 
eighteenth century, of the land tax — the last survivor of the 
mediaeval general property tax, — the house tax, and the assessed 
taxes. 

The adoption of product or produce as a test of faculty 
indeed marked a decided step forward. But as time went on s 
and especially after the industrial revolution, the shortcomings 
in the theory disclosed themselves. The very excellence of the 
idea of regarding only the thing rather than the person now 
itself gradually became a weakness. For, after all, taxes are 
paid by human beings and not by inanimate things. A piece of 
property may be assessed to taxation, but the tax must be paid 
out of the pocketbook or bank account— that is out of the 



TAXATION 45 

revenue — of some person. Since, under the system of private 
ownership, every piece of property belongs ultimately to an 
individual, to tax the yield of a piece of property really means 
finally to tax the revenue of an individual. As soon, however, 
as we regard the relative condition of individuals, it becomes 
apparent that a system of taxes on product is painfully defective. 
Two adjoining pieces of property, for instance, may enjoy pre- 
cisely the same yield ; yet in the one case the yield may be 
due exclusively to the bounty of nature, and in the other case 
it may be the result, in large part, of the supplementary efforts 
of the owner. Allowance may indeed be made for this state of 
affairs by distinguishing the net from the gross produce, and 
by levying the tax on the former. Primitive land taxes, for 
instance, like the tithes of old, were taxes on gross produce; 
whereas the more approved modern form of product taxation 
is a tax on net produce ; that is, making allowance for the 
expenses of cultivation. But this, although an undeniable step 
in advance, is not sufficient; for a system even of net produce 
taxes does not take account of the indebtedness of the individual. 
The net produce of two farmers, after allowing for the expenses 
of cultivation, may be precisely the same ; but if the owner of 
one farm has purchased it on a mortgage, his final net earnings 
will be less than that of his neighbor. The net produce of a 
piece of property, in other words, is no necessary indication of 
the net revenue of the owner. The tax upon the thing, just 
because it is upon the thing, does not lend itself readily to the 
shifting conditions of the man who owns the thing; and yet 
the real ability of a person to pay taxes must be in some rela- 
tion to his individual condition. Moreover, the immense in- 
crease in modern wealth and the appearance of prodigious 
fortunes have contributed to bring into prominence the idea 
of graduated taxation. Manifestly, however, a system of real 
taxes or taxes on product does not lend itself to the progres- 
sive principle. The larger piece of land may be owned by the 
poorer man, and the great wealth of the rich man may consist 
of a number of relatively small separate pieces of property. 
A system of taxation which in its very nature does not admit of 
progression evidently could not permanently respond to the 
necessities of the situation. With the revolution in the conception 
of faculty, the tax on product or on things thus came to be 
continually more unsatisfactory. Just as the gross produce 



46 SELECTED ARTICLES 

system gave way to the net produce system, so now the net 
produce system in its turn was bound to disappear. 

Income as the Test of Faculty 

It was thus that the fifth and final stage was reached, and 
that income was selected as the test of faculty in taxation. 
And there is no doubt that, taking it by and large, this responds 
more accurately to modern demands than any of the preceding 
tests. Accordingly, for a time, it seemed as if the new test 
would supplant all the other criteria, and as if all direct taxes 
at least would be abolished, to be replaced by a single income 
tax. Here again, however, more careful study disclosed certain 
weaknesses and disadvantages in income as the sole test of 
ability to pay. What are these weaknesses? 

In the first place there is the difficulty of deciding with 
accuracy what income really means. Do we mean by income 
gross or net income; and, if the latter, do we include in the 
term everything that comes in within a definite period, or should 
gifts, inheritances, and speculative revenues be excluded? 
Furthermore, do we mean by income only money income, or 
also the equivalent of money income? These points will be 
discussed below. Even assuming, however, that a satisfactory 
conclusion has been reached on this matter, the next difficulty 
arises from the fact that all incomes do not afford equally good 
criteria of a man's ability to pay. Is an income of $1,000 derived 
from hard personal work to be put exactly on a par with an 
income of $1,000 derived from an inheritance, or from a lucky 
turn in the market? The further question arises as to whether 
different amounts of income present identically the same criteria 
of ability to pay. Is $1,000 which forms the entire income of a 
day laborer to be treated in the same way as the $50,000 income 
of a millionaire? Manifestly, the identical rate on all kinds 
and amounts of income does not constitute an ideal criterion 
of tax-paying ability. But still further, even if we assume 
that these difficulties are in some way disposed of, let us compare 
the two following cases: A is a bachelor, in good health, with 
no independent relatives, residing in a small town where the 
scale of life is simple, and so little interested in charity or 
public affairs that he lays by a considerable amount every year. 
B is the recipient of precisely the same amount of income, but 
is a married man, with a large family; he lives in a great city 



TAXATION 47 

with its multitudinous social demands ; he is in poor health and 
must spend considerable sums on physicians and medicines ; he 
has relatives dependent upon him; and he is such a model 
citizen that he gives largely to charities and to public purposes. 
Can it be said that these two men, with precisely the same 
income, have precisely the same ability to pay? Finally, let 
us take the case of two men, one of whom has invested a large 
sum in business or in securities which yield a definite annual 
revenue, while the other has invested the same amount for 
speculative purposes in a piece of real estate which remains 
unimproved and therefore unrented, or in a railway stock which 
happens that year to pay no dividends. Can it be said that the 
latter has no ability to pay at all, as compared with the former, 
because he receives no income? 

These are but a few of the perplexing problems that con- 
front us as soon as we make the claim that income is a 
perfectly satisfactory or ideal test of faculty As a matter 
of fact, while income is in many respects a better test than 
any of the preceding criteria that have been mentioned, it is 
not a thoroughly adequate test, for the simple reason that no 
single test of ability can be found which will adjust itself to 
the varying needs of individuals. 

It is for this reason that the early enthusiasm for the 
single income tax, even in theory, gradually died away, and it 
was realized, to an ever increasing extent, that income must 
be supplemented by the other tests of faculty in order to form 
a well-rounded whole. No modern tax system, accordingly, 
relies entirely upon an income tax, even as the sole direct tax. 
Each of the preceding tests, while unsatisfactory in itself, never- 
theless possesses some advantages which can be utilized in 
framing a system of taxation ; property, product, expenditure, 
nay, even polls — each in turn can be employed as a partial test 
of faculty in order to fill out certain gaps. For instance, 
property may be utilized as a partial test in the case of wealth 
held for enjoyment, rather than for gain; in the case of property 
invested for speculative purposes ; in the case of property where, 
notwithstanding the temporary cessation of product, the money 
value is by no means negligible ; in the case of a desire to tax 
property incomes at a higher rate than labor incomes ; and, finally, 
in the case of great fiscal exigencies where it is necessary to 
take a part of the property itself, rather than simply its income. 



48 SELECTED ARTICLES 

A tax on product may be essential where a personal tax on the 
individual would be impracticable. A tax on expenditure is 
sometimes desirable either where the income cannot be ascer- 
tained or where, because of the temporary character of the 
individual's sojourn, a property or income tax could not well 
be enforced. To assert, therefore, as is often done by super- 
ficial thinkers, that the income tax is the fairest of all taxes, 
is to maintain an untenable position. Purely as a matter of 
theory, even, an income tax is by no means always the fairest 
of all taxes. The most that can be said with accuracy is that, 
in the main, so far as direct taxes are concerned, the system of 
taxation ought to be so framed as to correspond roughly with 
the income of the various classes of taxpayers. But to say 
that the ideal can be reached by any single income tax is 
preposterous. While the system of taxation should endeavor, 
roughly at all events, to adjust itself to income in general, the 
income tax as such can form only a part, even though it may 
be a permanent part, of the system, the other elements of 
which must be based upon the remaining criteria of faculty in 
order to reach as close an approximation to justice as may be 
possible. 

Finally, we are confronted by the question of the practical 
working of the income tax. Even if the income tax were the 
fairest of all taxes, — which, as we have seen, is not necessarily 
true, — the decision as to whether it ought to be utilized would 
depend largely upon whether this fairness, which is predicated 
of it in the abstract, would ensue in actual practice. It is 
notorious, however, that of all taxes the income tax is perhaps 
the most difficult to assess with scrupulous justice and accuracy; 
so that what is conceived in justice often results in crass 
injustice. If, therefore, we add these great practical defects 
to what are undeniable theoretical shortcomings, we are forced 
to the conclusion that the income tax is by no means the panacea 
which it has often been represented to be. 

With all these reservations, however, there is no doubt that 
in the struggle for social and fiscal justice the income tax is 
assuming a continually more prominent part, and if we do 
not pitch our expectations too high, we can understand why 
this should be so. Under certain conditions the efficiency of 
the income-tax administration may gradually be improved, and 
under most conditions the addition to the tax system of the 



TAXATION 49 

right kind of an income tax constitutes an undoubted step in 
advance. To ascertain what these conditions are, and what 
constitutes the right kind of an income tax, is therefore a study 
eminently necessary. 



BRIEF EXCERPTS 

It can be proven that the average American citizen works 
one month out of the year for the sake of being governed. In 
other words, taxation takes one-twelfth of his earnings. Robert 
Luce. Public Opinion. 13:51 April 23, 1892. 

The characteristic of the best tax is not that it is most 
nearly proportioned to the means of individuals, but that it is 
easily assessed and collected, and is at the same time most 
conducive to the public interests. Hugh McCulloch. Taxation 
and Funding, p. 18, 

No sound tax policy can be formulated that does not take 
into due account all of the principles above announced. But the 
basic principle that taxation should be imposed as nearly as 
possible in proportion to relative ability to pay, commands the 
unanimous approval of the Committee, and in that position it is 
believed to be in accord with the best modern opinion of political 
economists and authorities upon taxation in all countries. Report 
of the Joint Special Committee on Revenue and Taxation. South 
Carolina. 192 1. p. 52. 



PART II 
THE SALES TAX 



BRIEF 

Resolved: That it would be better for the United States to 
adopt a general sales tax in place of the higher surtaxes on 
income and the excess profits tax. 



Affirmative 

Introduction: 

A. Surtaxes on income and excess profits taxes defined 
and explained. 

B. General sales tax explained. 

C. Importance of the question. 

I. The higher surtaxes on incomes and the excess profits 
tax have failed completely. 

A. They are wrong in principle. 

1. They tax some people at higher rates than others. 

2. The rates of the surtaxes are too high — the highest 
in the world in 1920. 

3. They collect the bulk of the revenue on income, 
which is a very poor basis for a system of taxation 
because it is variable and intangible. 

B. They have not been successful as taxes. 

1. They are difficult and costly to collect. 

2. They are extremely inquisitorial. 

3. They do not yield sufficient revenue. 

a. The yield falls off very greatly in a year of 
depression. 

4. They are evaded more and more. 

a. By issuing stock dividends. 

b. By buying tax exempt securities. 

c. By selling stock and liberty bonds, so as to 
show a loss, and then buying them back again. 



54 SELECTED ARTICLES 

C. They have produced many harmful results. 

1. They drive large incomes into tax exempt secur- 
ities. 

a. This prevents accumulations of savings avail- 
able for investment. 

2. They encourage extravagance in business. 

a. Foresight and careful management are no 
longer rewarded. 

3. They encourage overcapitalization. 

4. They increase prices unduly. 

IT. A general sales or turnover tax would remedy these evils. 

A. It is sound in theory. 

1. It falls upon all alike — those who consume the 
most would pay the most in taxes. 

2. It is easy and cheap to collect: the tax would be 
added to the selling price without elaborate and 
expensive government machinery. 

3. It would be constant in yield. 

4. It is a broad and sure basis for taxation : a 
slight change in the rate would greatly increase 
the yield. 

B. It would not disturb general business conditions. 

1. It would encourage thrift and investments, and 
tax only extravagance. 

2. A very low rate on all sales would yield a large 
government income. 

a. Prices would not be greatly raised. 

III. The sales tax is a practicable remedy. 

A. It has been used with great success in France, Canada, 
Germany, Mexico, and the Philippine Islands. 

B. It is endorsed and recommended by many of our 

ablest financiers and businessmen. 

1. Otto H. Kahn. 

2. Jules S. Bache. 

3. Charles H. Lord. 

4. Myer D. Rothschild. 

5. Senator Reed Smoot 



TAXATION 55 



Negative 



Introduction : 

A. The plan and working of the surtaxes on income and 
excess profits taxes explained. 

B. The plan of the sales tax explained. 

C. The support of the sales tax is chiefly the propaganda 
of a few New York bankers. 

D. There is much loose talk about taxing extravagance, 
or taxing sales, or taxing tobacco, but a government 
can tax only its people and it should tax them in 
proportion to their ability to pay. 

I. The surtaxes on income and the* excess profits tax have 
worked remarkably well under the circumstances. 

A. They were well and carefully planned. 

1. The government had the advice and help of the 
ablest tax experts in framing them. 

2. All allowances have been made not to hinder 
business or work any hardships. 

B. They have been successful as taxes. 

i. They are easy and cheap to collect. 

2. They are very difficult to evade. 

3. It is impossible to shift them to others. 

4. They yield the funds the government needs. 

5. Their yield has been all that was expected. 

C. They are equitable, just, and fair. 

1. They fall upon people in proportion to their 
ability to pay. 

2. They supplement the tariff taxes, the internal 
revenue and excise taxes, and the other federal 
taxes which unjustly and unfairly put the burden 
of taxation on the poor. 

3. For the first time in American history our scheme 
of federal taxation has been fair and just to the 
poor people. 

a. This is better for the country because the 
rich will now be more interested in good 
government. 



56 SELECTED ARTICLES 

D. They do not interfere with legitimate business. 

1. Somebody must bear the burden of war taxation 
for generations to come, and all should bear it 
in proportion to their ability to pay. 

2. A legitimate margin of profit is left to honest 
business enterprises. 

II. A sales tax is very undesirable. 

A. A sales tax in place of the surtaxes and excess profits 
tax would put the whole burden of war taxation upon 
the poor. 

1. It would all be shifted to the ultimate consumer, 
a. This would greatly increase prices — the tax 

would pyramid, so that the ultimate consumer 
would pay much more than ever comes into 
the treasury of the government. 

b. It would be a tax against a living wage. 

c. People would be taxed in proportion to their 
needs, not in proportion to their ability to pay. 

2. The rich would practically cease to bear any of 
the burden of war taxation. 

B. It would tend to disorganize business. 

I. Business would have to adjust itself to the new 
conditions. 

2. Every change in the rate or the subjects of the 
tax would necessitate a business readjustment. 

3. Periods of contemplated change would bring 
uncertainty and chaos to the business world. 

C. It would strengthen and entrench trusts and monopolies 
and crush out small competing establishments. 

I. It would give a very great and unfair advantage 
to those industries which combine several proc- 
esses of manufacture over competing industries 
that perform only one or two of these processes. 

D. It would threaten and endanger American institutions. 

1. It would cause discontent and unrest among the 

poor. 

2. It would aid the cause of Socialism and Bolshev- 
ism. 



TAXATION 57 

III. The sales tax is impracticable. 

A. It would be difficult to collect. 

i. Most people in small business enterprises do not 
keep track of their individual sales. 

2. There is no way of knowing when such a person 
is paying all he has collected from the consumers. 

3. It would amount to "farming out" the taxes. 

B. It is easy to evade. 

1. Much more would be paid by the consumers than 
would be received by the government. 

C. It is doubtful of yield. 

1. It would fall off very greatly in a time of indus- 
trial depression. 

D. There is nothing in the experience of other countries 
to justify us in this experiment. 

1. Most anything "goes" in a partially civilized sub- 
ject nation like the Philippine Islands. 

2. Canada's experience with the sales tax is far from 
satisfactory. 

a. It only applies to a very small part of the 
sales, and exempts all of the necessities. 

b. It has been tried but a short time. 

3. It has been a disappointment, indeed a failure in 
France. (Nation 112:683) 

4. We are not ready to pattern any of our govern- 
mental affairs after Mexico. 

a. The report of the Carranza Tax Commmis- 
sion on a Model Tax. Plan recommended 
% the repeal of the sales tax. 
I\ The sales tax is opposed by practically all the recog- 
nized authorities on taxation. 

1. Prof. Edwin R. A. Seligman of Colupibia. 

2. Prof. Thomas S. Adams of Yale. 

3. Prof. Fairchild of Yale. 

4. Prof. Kemmerer of Princeton. 

5. Robert H. Montgomery. 

6. Joseph W. Fordney. 

7. David A. Wells. 



t 



BIBLIOGRAPHY 



An asterisk (*) preceding a reference indicates that the article or 
a part of it has been reprinted in this volume. A dagger (f) is used to 
indicate a few of the other best references. 

Other Bibliographies 

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to material in the New York Public Library. Reprint from 

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1918. typewritten. 8p. 

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Guaranty Trust Company of New York. Federal taxes on 
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Montgomery, Robert H. Income tax procedure of 1921. Ronald 
Press Co. 1921. 



6o SELECTED ARTICLES 

National Tax Association. Thirteenth annual conference, 1920. 
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p. 209-19. Discussion of the sales tax. 
p. 262-72. Discussion of the sales tax. 

Plehn, Carl C. British and American income and excess profits 

taxes compared. Continental Insurance Co. 1920. 
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1920. 

p. 277-9. The surtaxes. 
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act of 1918. R. G. & G. C. Blakey. 
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et al. 
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the federal income tax. Roy G. Blakey. 
Annals of the American Academy. 95 : 207-12. My. '21. Incidence 

of a sales tax. G. Hayes. 



TAXATION 61 

Bulletin of the National Tax Association. 4 : 14-20. O. '18. 

Pending revision of the income and profits taxes. Alfred E. 

Holcomb. 
Commerce and Finance. 10 1655-6. My. 11, '21. Canada's experi- 
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fiscal system. Henry A. E. Chandler. 
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debt and correct principles of post war taxation. W. F. 

Gephart. 
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inflationary influence of the proposed federal sales tax. F. 

W. Burrows. 
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the federal income tax. Charles W. McKay. 
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Carl C. Plehn. 
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Quarterly Journal of Economics. 32 : 1-37. N. '17. The war 

tax act of 1917. Frank W. Taussig. 
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literature on the sales tax. 
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the excess profits tax be repealed. Thomas S. Adams. 



62 SELECTED ARTICLES 

Review of Reviews. 63 : 53-7. Ja. '21. The treasury's plan for 

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Walter W. Liggett. 
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about federal taxation. David F. Houston. 

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Books and Pamphlets 

Bache, Jules S. The blight of taxation on American business. 

1920. I2p. 
Bache, Jules S. The power to tax is the power to destroy. 1921. 
Bache, Jules S. A practical tax in lieu of confiscation. 1920. 

I4P- 
Bache, Jules S. Release business from the slavery of taxation. 

1920. i6p. 
Bache, Jules S. The sales tax the only answer. 1921. I2p. 
Bache, Jules S. The turnover tax — the only way out. 1921. 

p. 33. 
Cornwell, William C. The cancer of taxation and how to cure 

it. 1921. I9p. 
Cornwell, William C. An intolerable situation — the gross sales 

tax the remedy. 1920. i6p. 
Cornwell, William C. The sales tax or tax on turnover. 1920. 

I2p. 

Frey, Morris F. Needed reform in the present tax laws. Guar- 
anty Trust Co. of New York. 1919. 19P. 

Kahn, Otto H. Addendum to "Some suggestions on tax revision" 
and the sales tax. 1920. 43p. 

Kahn, Otto H. The effect of tax revision on prosperity. 1921. 8p. 

Kahn, Otto H. Some suggestions on tax revision. 1920. 75p. 

Kahn, Otto H. Ten years of faulty taxation and the results. 
1920. Pamphlet. 52p. 

♦Lord, Charles E. Copy of memorandum or brief filed with the 
tax "committee of the National Industrial Conference Board 
Ap. 1920. 



TAXATION 63 

Lord, Charles E. Federal taxes and the farmer. 1920. 4p. 
Lord, Charles E. Making taxation a political asset instead of a 

liability. 1920. 4p. 
Lord, Charles E. Taxing a soap bubble. 1920. 4p. 
♦National Association of Manufacturers. Proceedings of the 

twenty-fifth annual convention 1920. 

p. 14-22. Report of the committee on taxation. 
National Tax Association. Thirteenth (1920) annual con- 
ference. Proceedings. 1921. 

p. 117-56. Some suggestions for the simplification of federal taxation. 
Hugh Satterlee. 

p. 169-80. Investigations and activities of The National Industrial 
Conference Board. R. C. Allen. 

p. 180-209. The gross sales or turnover tax. Meyer D. Rothschild. 

Rothschild, Meyer D. Gross sales or turnover tax at 1 per cent 

and no other tax on business. 1920. 3ip. 
Rothschild, Meyer D. et al. Primer gross sales or turnover tax, 

1920. i8p. 
Rothschild, Meyer D. et al. Primer gross sales or turnover tax, 

not exceeding 1 per cent and no other tax on business. 1921. 

52p. 
Satterlee, Hugh. Revision of federal taxation. 1920. 13P. 
Satterlee, Hugh. Taxation of sales. 1920. i8p. 
Wilfley, Lebbcus R. A sales tax the only remedy. 1921. 2ip. 

Periodicals 

♦Administration. 1 1659-66. My '21. Why a sales tax. B. S. 

Orcutt. 
Annalist. 16 : 3-4. Jl. 5, '20. Gross turnover tax as a substitute 

for existing laws. Meyer D. Rothschild. 
Bulletin of the National Tax Association. 6 : 263-9. Je« '21. 

Overturn sales tax on commodities. B. S. Orcutt. 
♦Congressional Record. 61 : 651-5. Ap. 27, '21. Address of Hon. 

Reed Smoot in the United States Senate. 
Congressional Record. 61 : 6964-73. O. 11, '21. Speech of Senator 

Reed Smoot. 
Current Opinion. 68 : 1 16-17. Ja. '20. Danger of the income tax 

law making Bolsheviki. Edward H. Bierstadt. 
Current Opinion. 70 : 451-3. Ap. '21. If you want prosperity, 

abolish the income tax. Frank Crane. 



64 SELECTED ARTICLES 

Current Opinion. 71 : 520-1. O. '21. Canada has a painless sales 

tax that yields $50,000,000. 
Economic World, n.s. 17 : 593-5- Ap. 26, '19. The expediency 

of existing federal taxation. Otto H. Kahn. 
Economic World, n.s. 17 :9io-n. Je. 28, '19. Canadian opinion 

about the effect of severely graduated income taxation upon 

industrial leadership. 
Economic World, n.s. 18 : 306-7. Ag. 30, '19. The federal tax 

on sales as it would effect the price of beef to the ultimate 

consumer. 
fEconomic World, n.s. 21 : 341-3. Mr. 5, '21. The sales tax 

and our fiscal system. Henry A. E. Chandler. 
Forum. 64 : 191-7. S. '20. Where the taxes should be placed. 

Charles E. Lord. 
Forum. 64 : 253-68. N. '20. Some suggestions on tax revision. 

Otto H. Kahn. 
Forum. 64 : 421-40. D. '20. Suggestions for tax revision. Otto 

H. Kahn. 
fLiterary Digest. 65 : 142-7. My. 22, '20. How a sales tax would 

work out. 
Literary Digest. 65 : 158. Ap. 17, '20. A banker's suggestions for 

better taxes. 
Manufacturers' News. Jf. 16, '21. Strong plea for an equitable 

sales tax. F. J. Moss. 
Mining Congress Journal. 7 : 207-12. Je. '21. General sales tax 

is inevitable: why not now? Reed Smoot. 
fMonthly Bulletin of the Chamber of Commerce of the State of 

New York. 12 : 37-46. Ja. '21. The sales tax a success in 

the Philippines. Can it be made successful here? John S. 

Hord. 
Outlook. 125 : 496-8. Jl. 14, '20. Painless taxation. A possible 

substitute for the income tax. Theodore H. Price. 
Outlook. 126 : 191-3. S. 29, '20. Painless taxation. Is an 

employer's privilege tax practicable? Theodore H. Price. 
*Review of Reviews. 63 : 57-60. Ja. '21. Why not a sales tax. 

Jules S. Bache. 
Review of Reviews. 63 :202. F. '21. The sales tax in the 

Philippines. 



TAXATION 65 



/ 



Negative References 
Books and Pamphlets 

♦Adams, Thomas S. Needed tax reform in the United States. 
New York Evening Post. 1920. 

Chamber of Commerce of the United States. Report of the 
special committee on taxation. 

National Industrial Conference Board. Proceedings of the (first) 
national industrial tax conference at Chicago, 111. Ap. 16, 
1920. Special report no. 9. 1920. pamphlet. H3p. 

National Industrial Conference Board. Proceedings of the 
second national industrial tax conference. New York city. 
Oct. 22-3, 1920. 1920. Special report no. 17. pamphlet. 200p. 

♦National Industrial Conference Board. Report of the Tax com- 
mittee of the National Industrial Conference Board on the 
'federal tax problem. Special report no. 18. D. 1920. pamphlet. 
58p. 

National Tax Association. Twelfth (1919) annual conference. 
Proceedings. 1920. 
p. 312-13. General sales tax. Thomas S. Adams. 

Periodicals 

♦Administration. 1 1491-503. Ap. '21. Why not a sales tax? 

Walter A. Staub. 
♦American Federationist. 28 : 495-7. Je. '21. Sales tax, — an 

iniquitous proposal. Samuel Gompers. 
♦Annals of the American Academy. 97 : 67-75. S. '21. Taxation 

that will not impair business. Clyde L. King. 
Bulletin of the National Tax Association. 6 : 270-5. Je. '21. 

The case against the sales tax. Fred R. Fairchild. 
♦Congressional Record. 60 : 2463-75. Ja. 31. '21. A war sales 

tax during peace. Hon. James A. Frear. 
Congressional Record. 61 14443-5. Jl- 2I » ' 2I - Remarks of 

William Williamson. 
Congressional Record. 61 16974. O. II, '21. Remarks of Senator 

Irving L. Lenroot. 
Economic Journal. 2J : 1-15. Mr. '17. A conscription of income 

a sound basis for war finance. O. M. W. Sprague. 
Independent. 90 1487. Je. 16, '17. Taxation sound and un- 
sound. 



66 SELECTED ARTICLES 

Mining Congress Journal. 7 : 129-31. Ap. '21. Problems of 

Congress in the revision of the revenue laws. Hon. James 

A. Frear. 
Mining Congress Journal. 7 : 207-12. Je. '21. General sales 

tax: its disadvantages outweigh its virtues. H. B. Fernald. 
Nation. 108 : 316-17. Mr. 1, '19. The new revenue act. Thomas 

S. Adams. 
Nation. 112 : 683. My. 11, '21. The undesirable sales tax. 
*Nation. 113 : 315. S. 21, '21. Where is the tax burden going? 

Whidden Graham. 
Nation. 113 : 350. S. 28, '21. The vicious sales tax. J. P. War- 

basse. 
New Republic. 11 : 300-1. Jl. 14, '17. Conscription of income 

once more. O. M. W. Sprague. 
*New Republic. 22 : 304-5. My. 5, '20. Substitutes for the 

profits tax. 
Public. 21 : 721-2. Je. 8, '18. Publicity for incomes. 
Review of Reviews. 63 : 53-7. Ja. '21. Treasury's plan for 

federal taxes. David F. Houston. 
Taxation. 1 : 21-2. F. '20. Discrimination against the poor. 
Taxation. 1 : 27-8. F. '20. Mr. Kahn points the way. 
World's Work. 43 : 103-7. N. '21. Taxes — which and why. 

David F. Houston. 



INTRODUCTION 

The first and most important of the maxims with regard to 
taxation that were laid down by Adam Smith almost one hundred 
fifty years ago, that taxes should be apportioned among people 
in proportion to their ability to pay, is a rule that has been 
accepted by almost all the best authorities who have written 
upon the subject since that time, but it is a rule, so far as our 
federal government is concerned, that has been "more honored 
in the breach than the observance." From the adoption of 
the federal constitution until after the United States entered 
the great war our national government was supported almost 
entirely by funds collected by means of the tariff or customs taxes 
and by the internal revenue or excise taxes together with the 
earnings of the post office, all of which are consumption taxes, 
that is, taxes upon people not in proportion to their ability to 
pay, but in proportion to their needs, in proportion to what they 
eat, drink, wear, and use. It was only under the stress of war 
necessity that this policy was changed by the adoption of the 
excess profits tax and the higher surtaxes on income and the 
federal goverment began to collect any considerable part of its 
income from taxes that fell upon the people in proportion to 
their ability to pay. 

We are told in the Eleventh Report of the Michigan Board 
of State Tax Commissioners and State Board of Assessors 
(1920. p. 25-26) that the history of taxation and of attempted 
tax reforms is a record of a continuous struggle between 
different economic classes of society to shift to another class 
the burden of taxation. In the earlier days these struggles were 
often attended with violence and bloodshed, but now they are 
fought out at the polls, in the committee room, and in the legisla- 
tive halls where the weapons are chiefly oratory, literature, 
lobbies, and organized propaganda. In the proposition to repeal 
the excess profits tax and very greatly to reduce the higher 
surtaxes on incomes and to adopt in lieu thereof a general sales 
or turnover tax, we have a concrete example of this struggle 
between classes. It is the old controversy merely in a different 
form. Here the issue between classes is squarely joined. 



68 SELECTED ARTICLES 

It is not so one-sided a question as one might be inclined to 
think at first glance, and a middle ground may be the wisest 
course. The surtaxes on incomes were higher in the United 
States in 1920 than anywhere else in the world. Able and public 
spirited business men declare that the excess profits tax, with 
the other heavy tax burdens on business, is killing industry. 
They say that vast sums have been driven into tax exempt 
securities which otherwise would have gone back into the chan- 
nels of industry to develop and expand industrial undertakings. 
This, they claim, is at least a contributing cause of the present 
industrial depression. Certain it is that the revenue that the 
federal government has derived from the excess profits tax and 
from the income tax was considerably smaller in 1921 than it 
was in 1920. Whatever may have been the injustice and the 
unfairness of the extensive use of consumption taxes by the 
federal government during the first century and a quarter of its 
existence, still the fact remains that in 1920 it collected less than 
one-quarter of its income by such forms of taxation. 

Taxation will be a great national problem for years, possibly 
for generations to come. It is a problem that deserves far more 
thought and attention by the people generally than it has 
received in the past. It was less than forty years ago that 
Francis A. Walker commented upon the dearth of literature of 
taxation in the English language. While, most fortunately, this 
condition is no longer true, still almost any librarian will now 
say that among the books in his library that are least used are 
those on taxation. Were this not so we should hardly expect 
to hear a distinguished champion of the sales tax support his 
cause with any such obvious sophistry as, "It rests fairly as 
between citizens. The one who consumes the most and spends 
the most, pays the most in taxes." So unfamiliar are many 
people with the facts and the literature of taxation that some 
may fail to realize how absolutely untrue and ridiculously absurd 
the above statement is. In a brief, general, and very elementary 
discussion of taxation written more than twenty-five years ago 
Dr. Frank S. Hoffman said (The Sphere of the State, p. 120) 
"Ought what a person consumes to determine the portion that 
he should contribute to the support of the government? . . . 
The man with millions and few personal expenses might often 
by this arrangement contribute less to the support of the 
government than a day laborer with a large family who possessed 
almost nothing. . . It can hardly be doubted that our national 



TAXATION 69 

taxes upon salt, coal, clothing, and the materials used in the 
construction of dwellings, violate the very first principles of 
justice and economics. . . The expenditure system, or tax on 
consumption, oppresses the working classes, obliging them to 
pay not only their own taxes but a large proportion of the taxes 
of others." 

The younger student must not be misled by the oft-repeated 
phrases of "taxing tobacco" or "taxing sugar." Any govern- 
ment can tax only its citizens. All taxes are paid by people. 
It may be that the different people pay their taxes in proportion 
to the amount of sugar and tobacco they consume, but the taxes 
are paid by people and not by tobacco or sugar. The problems 
of taxation are only to determine in what proportion, on what 
basis, and b} r what method the government shall assess taxes upon 
its people. 



AFFIRMATIVE DISCUSSION 

WHY NOT A SALES TAX 1 

A discussion of the gross sales or turnover tax, which is 
confined alone to that tax, is futile in helping to reach a conclu- 
sion as to its availability. 

While it is essential that the advocate of that tax should 
first refute as far as it is in his power the objections raised 
by its opponents, he should above all endeavor to show the 
greater objections to each of the other taxes, and thus, by the 
process of elimination, endeavor to prove that the turnover 
tax, while by no means ideal, is the one against which the 
fewest objections can be raised. 

Idealism and taxation are about as great antitheses as one 
can find. Taxes must be viewed in the light of necessary evils, 
and, while it may be permitted to drift on ideals, hard, practical, 
common sense must be used in handling evils. 

As I participate in discussion after discussion on the subject 
of the turnover tax, I find two fundamental criticisms, and 
practically only two. 

I have searched in vain through the writings of Professor 
Adams, of Yale University, the leader in the opposition to this 
form of taxation, for any other objections on which to center 
an argument, but they are all so easily refuted that in most of 
his addresses he refutes them himself. 

The two objections which I say are fundamental are, first, 
the question as to whether the tax can be passed on, otherwise 
making it a tax on gross income, and, second, the further 
question as to whether it will result, as Professor Adams claims, 
in monopolizing the movements of an article in the processes 
of its manufacture, giving the self-contained business a 
prejudicial advantage, thus leading to the elimination of the 
middle man. 

1 By Jules S. Bache. Review of Reviews. 63:57-60. January, 1921. 



12 SELECTED ARTICLES 

Minor Objections 

There are many criticisms which I deem hardly of sufficient 
importance to mention more than casually. Among them are : 

1. That if the tax is shifted, as it must be, it would be a tax 
against the living wage. 

I contend that this is far less likely in a general sales tax 
than in the proposition of specifically taxing sugar, coffee, tea, 
etc., making the tax identical, on the cheap article, with that 
upon the dear article, and in the case of the already existing 
taxes, of the specific levy on about fifty different kinds of 
business in which the tax is unquestionably against the living 
wage. 

Even if it could be construed that the general sales tax 
might- rest to some extent in greater effect upon the small wage- 
earner, that can be more than offset by raising the income tax 
exemption to $5000. 

2. That the tax will be loaded. 

I think the basis for this assertion is in the fact that the 
present excess profits taxes are undoubtedly being loaded, and 
overloaded, as they are passed along, but this is because of the 
uncertainty of these taxes. There would be no such uncertainty 
in the sales tax. It is true that the business dealing in a 
multiplicity of articles and finding it impossible to pass the 
fractional amount on, which a 1 per cent tax would call for, on 
any one of the articles, might seek compensation for the loss, 
in loading the small difference on to some other one of its 
numerous lines. The infinitesimal fraction which 1 per cent on 
a cheap thimble might call for, might be added to the fraction 
on some other similar article, in order that the firm may 
recover from the ultimate-consumer its complete overhead, as 
called for by this tax. 

3. That the amount which such a tax would produce cannot 
be calculated. 

This I will admit only partially; but it is not a good objection, 
since one year's application would prove it completely, and even 
though it is admittedly difficult to calculate what such a tax 
would produce, there are bases on which to found calculations, 
viz. : 

France has a population of about one-third that of the United 
States, and a much more thrifty population. In its calculations, 
upon which the 1 per cent turnover tax was based, the fiscal 



TAXATION 73 

authorities counted upon the tax producing $1,000,000,000. In 
practise, since July 1, when the tax began to operate (and all 
taxation experts admit that in its initial stages no tax produces 
full returns), the collections have been satisfactory, and the 
French Commission here expects that it will bring returns fully 
up to the estimate; and on that basis, and without allowing 
for the increased proportionate expenditures of our population 
in comparison with those of France, we would raise $3,000,000,000. 

Taking the latter element into consideration would give some 
color to the objections that the yield of the tax would probably 
be considerably in excess of the amount estimated. I have 
never found taxing authorities objecting to a tax which yields 
more than is calculated; but if it should do so in this instance, 
the rate can promptly be reduced, and the temporary excess 
used for a decrease of the national debt. 

Expert estimates have varied all the way from $3,000,000,000 
to $7,000,000,000, but one of the leading members of the Finance 
Committee of the Senate, who has been in touch with this 
movement ever since its inception, has stated that he is prepared 
to go on record with the prediction that this tax will net very 
close to $4,500,000,000 in its initial application. 

4. Administrative difficulties. 

Professor Adams, in his recent speech before the Economic 
Club of New York City, drew particular attention to the fact 
that the tax bureaus in Washington were on the verge of a 
breakdown. I consider this one of the strongest arguments in 
favor of a simple, automatically collectible tax, such as this 
one, which will, in my opinion, and in the opinion of those who 
have studied the situation, furnish material relief to the burdens 
in Washington. But at all events, objection should hardly be 
raised to a tax which will relieve the mental and manual labor 
required for the collection of taxes by an administration em- 
ploying as many as seven hundred thousand functionaries. 

The staff now being employed on the excess profits tax 
and on fifty-five individual and different sales taxes, would be 
found to be far in excess of that required to collect a simple 
and automatic turnover tax. 

5. That the attempt to institute this tax would lead to 
opposition from the man in the street. 

I believe that this is merely a question of education. The 
American laboring man, farmer, and business man is essentially 



74 SELECTED ARTICLES 

fair-minded, and, while it is a natural tendency (not peculiar 
to the inhabitant of the United States) to unload one's burdens 
on one's neighbor, I believe that the average American is less 
inclined to do this than the citizen of most nations. But while 
with little difficulty it can be shown that no one's burdens are 
in any way lightened by the present system or other mooted 
systems, the great majority of the business world of this country 
would have its burdens almost entirely lifted by the initiation 
of this form of taxation, and enthusiastic approval could be 
enlisted. 

I have had a recent expression from a power in the farming 
world that it would take very little general information to the 
farming community of the United States to put them solidly 
behind this tax. The very agitation for a specific tax of 2c. on 
coffee and sugar, and ioc. on tea and gasoline, would, I believe, 
prove educating to the farmer; and when we stop to consider 
that the political opposition is dwelt upon as an argument against 
the tax by the very people who recommend these specific taxes 
on sugar, coffee, tea, and gasoline, it is, to say the least, 
amusing. 

I believe that a tax so equally divided that every man, in 
proportion to his station in the community, would shoulder his 
share of it, would become quite popular, if that fact were used 
as an argument against it. 

Fundamental Objections Answered 

This brings me back to the discussion of the two fundamental 
objections already mentioned, viz.: (i) Doubt as to whether it 
can be passed on; and, (2) Giving an unfair advantage to 
businesses which combine the processes of manufacture of an 
article over those which are engaged in only one or two of those 
processes. 

I believe the turnover tax will ultimately be looked upon 
as an overhead charge, pure and simple. In passing it on it 
must be treated in the same manner as any other overhead 
charge, such as rent, labor, and kindred items. In times of 
falling prices it is possible that none of these charges can be 
passed on. The tax would share the same fate. 

Business must be visualized as being conducted for profit. 
Times of loss must necessarily be the exceptions, or no business 
concern would remain solvent; and in times of profit all over- 



TAXATION 75 

head is passed on. Some overhead is passed on in an exagger- 
ated form. This tax never should be. It can be too easily 
calculated. Rent and labor may be an unknown quantity to the 
purchaser of the goods, but this tax will be a known quantity. 
Its amount can be specifically stated at the bottom of a bill. 
It will be so small when so stated, in proportion to the amount 
of the bill, that it will hardly cause any irritation. The practice 
of specifically charging it in a bill would make it a habit, and 
we are decidedly a people of habit. The first straphanger in a 
street car was surely a disgruntled individual. Straphanging 
has become a habit. 

If, for any reason, the tax cannot be passed on (and no one 
has as yet voiced any particular instance where that reason 
exists) it should not be allowed to apply. I believe that this 
latter policy should be a basic element in any provision for this 
tax. 

As to the other objection, viz.: That it will lead to monopoly 
in business by the elimination of the middle man, I consider 
this entirely specious. 

The United States Steel Corporation has never been attacked 
for the reason that it controlled in their entirety the movements 
of iron ore from the mine to the delivery of the finished steel 
into the hands of the consumer, but because it was accused of 
monopolizing the volume of the output. Such competition as 
it has had, has hardly been eliminated under proper management, 
by its controlling the various movements of the product. But 
should the tax result in business being more self-contained (and 
public policy requires protection for the middle man), it would be 
a very simple and elementary change to double the tax on the 
turnover of such companies as chain stores which manufacture 
their own articles, and catalogue mail-order houses; and as the 
average tax levied on articles which pass through several move- 
ments before they reach the consumer will not be over 2% per 
cent, a doubling of the tax to 2 per cent on such business would 
more than protect the middle man, if he needed protection, which 
I venture to doubt. 

The tendency of modern business development has been 
toward reduction of the cost of distribution. If, in the course 
of that tendency, it has been found that the cost of distribution 
is reduced by business being more self-contained, viz : by 
corporations handling the various movements of the article 



76 SELECTED ARTICLES 

themselves, no sympathy for the middle man has prevented this 
movement. 

The cotton mill which does its own purchasing of raw 
material, the weaving of the yarn, and the dyeing of same, and 
which in the past had only purchased the yarn and manufactured 
its product, has not been attacked by anyone for eliminating 
one or two middle men by its becoming more self-contained. 
The silk mill which buys its raw silk in Japan, throws and 
dyes it, and spins its thread, has not been attacked on that 
ground. 

The ultimate tendency will be for all business to become 
more self-contained. If this tax should hasten the process, it 
would only prove that the tax is operating in the spirit of 
the times. 

The basis of world unrest lies in the burdens of taxation. 
Foreign news which we get from the press is full of suggestions 
being followed by the finance ministers of the various nations 
for new kinds of taxation. 

The income tax, which theorists have claimed was the ideal 
method of raising large sums, has been worked until it has 
obtained a strangle-hold upon all initiative and the limits of 
national solvency. 

The capital tax is but another kind of income tax, which in 
its results means a steady reduction of the return from the 
income tax. The sales tax would go on uninterruptedly forever, 
without injuring the capital from which it was drawn, and 
would hardly fluctuate more than an average of 10 per cent per 
annum in its yield. It would grow with the growth of the 
world. It would become less and less of a burden as its results 
grew. 

If all nations were to adopt it it would put them on an equal 
footing in attracting constructive immigration. A tendency is 
already evident of nations desiring to attract immigration, 
announcing as a policy the abandonment of the income tax. 
Mexico has already made this announcement. So have some 
South American countries. 

People with confidence in the success of their futures will 
hardly choose as the field of their activities a country levying 
large percentages on the results of the individual efforts. I 
believe that in time the income tax in its present form will be 
abandoned by all nations. Will this country lead the world in 



TAXATION 77 

this, as it has in many other progressive movements, or will it 
wait and follow when it is compelled to? This is the problem 
which the business man must help in solving, since I believe 
that it is only by the growing popular demand for the application 
of this tax that our legislators will be forced to adopt it. 

Advantages Summarized 

In conclusion, I would reiterate the nineteen points under 
which I have already summed up the advantages of this tax. 
Where is the opponent of this tax who can give us as many 
advantages for any other form of taxation? And, above all, 
for any other tax which can be counted upon to raise such a 
large percentage of the financial requirements of our govern- 
ment? 

These points are as follows : 

i. It is a complete change from the present system and 
meets all the objections to prevailing methods. 

2. It is simple where the present system is distressingly 
complicated. 

3. It will produce ample revenue, whereas the taxes now 
imposed, as profits and incomes decline, must fall far below 
amounts required. 

4. Under the sales tax government revenue is based upon 
something tangible, namely, the expenditures of the people, which 
go on unceasingly and do not vary in hard times or good times 
to such an extent as seriously to affect the revenue. 

5. It will stop capital from hiding in tax-exempt securities. 

6. It allows the country to save funds for future indus- 
trial expansion. 

7. It will restore competition, enterprise, and individual 
initiative, now smothered to death by the pursuit of the tax- 
gatherer. 

8. It will encourage business thrift, stopping the waste of 
high salaries and extravagances, which can then no longer be 
charged off against taxes. 

9. Its collection is simple and automatic for both the govern- 
ment and the taxpayer. 

10. It is fair in its distribution. The one who consumes the 
most and spends the most pays the most in taxes. 

11. It will not increase the price of commodities beyond an 
average of 2% per cent, whereas now taxes increase prices 
nearly 25 per cent. 



78 SELECTED ARTICLES 

12. Consequently, it will tend to reduce present prices to a 
marked degree. 

13. It has been in successful operation in the Philippines for 
years and has proved in every way satisfactory. 

14. It has recently been put into operation in France, and 
is thus far strikingly successful. 

15. Some forms of it are in operation in Canada, and it is 
so satisfactory that leading interests there are urging that it be 
adopted as a complete substitute for all other taxes. 

16. It is based on sound democratic principles and, by reach- 
ing out into new sources of revenue, spreads the tax load 
equitably and in a way most easily borne by all. 

17. As it will be passed along to the consumer, millions of 
people will pay the tax, but nobody will know it or feel it 

18. It enables every taxpayer to know his tax liability. 

19. It is surer in its incidence, simpler in its application, 
more productive in results, more economical in its collection, 
and less of a burden upon everybody than any other known 
form of taxation. 



WHY A SALES TAX? 1 

There is a great deal of underbrush to be cleared away 
before the outlines of a sound and sane overturn sales tax can 
be clearly discerned. The advocates of a sales tax do not, 
unfortunately, all talk the same language, and the opponents 
of any uniform overturn tax joyfully jumble all the divergent 
views advanced into a straw-man of their own conception and 
then proceed to try to set it on fire. But it won't burn. Part 
of it is non-inflammable. This non-inflammable material in 
the straw-man is the suggestion for a tax at each step in the 
sale of commodities by any one to any one. 

By commodities I mean just what the dictionary says— 
"goods, wares, merchandise, produce of land, and manufactures." 

By a tax at each step in the sale of commodities, I do not 
mean a tax on the gross receipts of everybody engaged in any 
activity. I mean a tax so levied that the vendor of commodities 
shall become the collector of a tax measured by the price agreed 

1 By B. S. Orcutt. Administration. 1:659-66. May, 1921. 



TAXATION 79 

upon with the purchaser, and compulsorily passed on to the 
purchaser by means of a special charge, as a tax, specifically 
billed as such, on the invoice to the purchaser. 

To approach the situation right in the middle, I mean that 
if John Smith is a manufacturer of overalls, he must buy his 
cloth, his thread, his buttons, his buckles, his drill, from various 
people who manufacture these things. He buys one thousand 
yards of denim from John Doe at 30c. a yard. The bill is $300 
plus, at 1 per cent, $3 tax collected from Smith by Doe and 
turned over to the government by Doe. He buys ten gross of 
buttons from John Jones for $8. The bill is $8 plus $.08 tax. 
He buys from John White a gross of buckles for $2. The bill 
is $2 plus $.02 tax. He buys from John Green ten spools of 
pocket drill for $15. The bill is $15 plus $.15 tax. He buys 
from John Brown ten spools of thread for $7. The bill is $7 
plus $.07 tax. 

The total cost of material for a gross of overalls is then 
$335-3 2 » of which ^332 is the invoiced cost of material and ^3.32 
is the invoiced tax collected by the vendors of cloth, thread, 
buttons, buckles and drill, and turned over to the government. 

John Smith goes about his business of manufacture in the 
confidence that he bought this material at the best possible price 
and that every competitor has paid the same tax rate on material. 
Smith sells his gross of overalls for $864, or $6 each. He bills 
the overalls to the retailer at $864 plus $8.64, or a total of 
$872.64, of which Smith acts as government collector of $8.64. 

The tax on Smith has been $3.32, if there was any tax at all. 
It has been a consumption tax pure and simple, measured by 
the amount of his purchases, not of his sales. Every competitor 
has been obliged to pay approximately the same tax, varied 
slightly by his skill or luck in buying. The tax has gone into 
the cost of goods, just as has labor, freight and overhead. 
Smith and his competitors have each been obliged to make their 
sales price irrespective of their obligations to collect a tax, and 
what they do collect goes to the government and is not a 
percentage paid by them on their gross receipts. 

Before the materials got to Smith a similar tax was paid on 
previous processes, and was all included in the $3.32 that Smith 
paid. When the manufactured product leaves Smith, the retailer 
pays the tax of $8.64, or $.06 on each garment. When the 



8o SELECTED ARTICLES 

retailer sells to the poor, downtrodden laboring man at $8 a 
garment, the tax becomes $.08. It doesn't interest me particularly 
whether the retailer collects the $.08 tax from the eventual 
consumer or absorbs it himself. My object is to make it a 
consumption tax all the way down to the retailer, and to con- 
sider it nothing but a consumption tax. 

The words "consumption tax" sound fearsome to the pol- 
itician, who still talks glibly about the tariff. The tariff tax is 
a consumption tax pure and simple when applied to articles 
not produced in this country. It is, like the excess profits tax, 
a consumption tax plus, when applied to articles that are pro- 
duced in this country. All the present miscellaneous sales taxes 
are consumption taxes. I tried to explain to a correspondent 
that tariff tax of 10c. a pound on coffee was a consumption tax. 
He dismissed my illustration with the, to him sufficient, answer 
that "the tax on coffee is a tariff matter." Then he added : 
"Whether your importer enters the amount of the tariff on 
his bill as a separate item or includes it in his gross price, is a 
matter of absolutely no consequence. He will get all the market 
will stand for his coffee in either case." 

Precisely, that is exactly what I am trying to get at. He 
would do the same thing were there no tax, and so would his 
competitor. The element of competition and price is not 
influenced by the tax. So with a uniform overturn tax, invoiced 
as such! 

There "ain't no such animal" as a tax that nobody pays. A 
proper consumption tax is a tax that is passed on to the final 
consumer just exactly as it is levied, not augmented many times 
like the excess profits tax, and not absorbed by business like 
the imaginary tax that sends shivers down the spines of unduly 
alarmed middlemen. 

Now all this is different from a retail sales tax like the 
present tax on jewelry, or luxuries, or ice-cream. It is different 
from a tax on gross receipts that may be absorbed or pyramided 
at the option of the dealer. It is different from a tax on 
services, or on the transfer of capital assets. It does not conflict 
with the long established special excise taxes on tobacco and 
spirits, with the stamp taxes on documents, or with the income 
tax. 

A tax on overturn sales of commodities cannot be a direct 



TAXATION 81 

substitute for the excess profits tax. The two taxes are not 
comparable except in the one feature of being an ultimate cost 
to the consumer, for of course without profits derived from 
the consumer, there is no excess profits tax. Abolition of the 
excess profits tax involves readjustment of surtaxes and of 
corporate normal tax to bring about equality between stock- 
holders. This is a problem by itself that would be just as much 
a problem were there no other tax than the income tax. 

Conversely, the clash between special consumption taxes and 
a general consumption tax would still exist were there no 
income tax and were all revenues derived from consumption 
taxes. 

As a matter of fact, practical considerations make necessary 
not only an income tax and a consumption tax, but also certain 
privilege taxes, which again are in the class by themselves. The 
problem with respect to classes of taxation is to make them 
balance properly. Hence, we can discuss the principle of the 
consumption tax without regard to other classes of taxes. 

The issue with respect to an overturn sales tax on com- 
modities is an issue between one, general, uniform tax and many 
special, irregular, unrelated, confusing, and annoying taxes. 

There are now special consumption taxes on some one 
hundred different articles, laid at different rates and collected by 
various methods. The resulting confusion is endless, the leakage 
is unknown, and in many cases the revenue derived is negligible 
and the cost of collection excessive. Some of these taxes are 
levied on the producer and some on the consumer. 

In the latter (the consumer) class, the vendor acts merely 
as a collector for the government, and equality is therefore 
assured as between consumers of the particular articles taxed. 
Examples of this tax are the 10 per cent collected from pur- 
chasers of theatre tickets, the 4 per cent collected on perfumes, 
cosmetics, patent medicines, etc., the 10 per cent collected on 
certain alleged luxuries, the 10 per cent collected on ice-creams, 
etc. 

In the former (the manufacturer) class, the vendor pays the 
tax. There is equality between vendors in so far as each must 
pay a tax, but there is nothing to show whether the tax has been 
passed on or absorbed, whether it has been augmented or 
diminished. Examples of this class are the 5 per cent levied on 



82 SELECTED ARTICLES 

sales of automobiles, 10 per cent on sporting goods, 3 per cent 
on chewing gum, 100 per cent on brass knuckles, 5 per cent on 
jewelry. 

In neither class is there any rhyme, reason, coordination or 
guiding principle in the selection of the articles taxed or in the 
rate exacted. Admittedly, the entire scheme was an emergency 
recourse, and is illogical, unfair, absurd, and administratively 
chaotic as a permanent basis of taxation. But a little study of 
the practical application of these taxes brings to light certain 
principles that might and should be applied to all consumption 
taxes. 

In practice, the dispenser of an ice-cream soda sets a price 
of say 15c. for the article, and then collects the tax of 2c. from 
the consumer. All consumers pay that 2c. It does not enter 
into the overhead or the expense of conducting the business. 
It is a tax that "runs with the goods." The element of 
competition between dispensers is eliminated so far as the tax 
is concerned. One dealer may use a larger glass than his 
competitor, or he may use a more expensive syrup, or he may 
charge 13c. instead of 15c. for his concoction, but the tax 
remains constant at the rate established by law. It is paid with- 
out relation to his income. The competition between himself 
and his neighbor remains just as it would be were there no tax. 
It is questionable how much of this tax gets to the government. 
The Treasury Department doesn't know. But the consumer 
never fails to pay. 

In practice the automobile manufacturer makes a price for 
his car f.o.b. at the factory. To that price he adds 5 per cent 
as the tax which he then actually collects from the purchaser, 
although in this case the law levies the tax on himself. He 
adopts this procedure because it brings about simplicity and 
equality in the computation and collection of the tax, just as if 
the tax had been levied on the purchaser, as was the case with 
the ice-cream soda. He adjusts his price in competition with 
his rivals. The existence of the tax makes no difference to 
him as compared with his competitors who adopt the same 
practice. 

However, all the manufacturers' taxes do not work thus 
simply. The manufacturer of basketball shoes is taxed 10 per 
cent if he calls them basketball shoes, but there is no tax if he 
calls them "sneakers." The manufacturer of a hunting knife is 



TAXATION 83 

taxed 10 per cent if he calls it a hunting-knife. He is not taxed 
at all if he calls it a sheath knife. The manufacturer of a 
billiard table is taxed 10 per cent, but there is no tax on a 
mantlepiece made alongside out of the same materials. These 
people cannot easily segregate the tax, and it ordinarily goes 
into general cost to be passed on or absorbed or guessed at. 
Then it immediately becomes a percentage on gross income. 

The manufacturer of toilet soaps is taxed 3 per cent and the 
manufacturer of candy 5 per cent, on sales prices. Neither can 
apportion this to individual sales so it goes into cost and becomes 
a percentage on gross income. 

It is right here that the objection most seriously urged 
against an overturn tax comes into play. Unless the sales tax 
is definitely passed on to the consumer it becomes a tax on 
gross income and is open to the criticism that it is unequal as 
applied to net income. It should always be passed on to the 
consumer. Hence all the arguments based on the idea of relation 
to net income are waste motion so far as the dealer is concerned. 

An overturn sales tax should be distinctly confined to com- 
modities — that is, to goods, wares, and merchandise — and it 
should be frankly a consumption tax like the tax on ice-cream, 
theater tickets, and the so-called selected luxuries. It should 
always "follow the goods" by specific invoice. It could never 
then be inflated or have any effect on competition any more than 
if it never existed. 

Assume that all these irrationally unrelated, irregular, pesti- 
ferous, specially-selected excise taxes were wiped out, and a 
general tax, of say 1 per cent were levied on all overturns from 
the producer to the consumer, with the special and distinct 
proviso that the tax is an addition to the sale price and is to be 
so invoiced on the bill. How can such a general tax have any 
influence on competition or be inflated to consumers or work 
any injustice as between one producer and another or as between 
one consumer and another? 

The Philippine overturn tax is so administered, the purchaser 
paying for the stamps which are merely the machinery of collec- 
tion, not by any means necessary. The French tax, the Canadian 
tax and the Mexican tax are so administered. All are perfectly 
simple and satisfactory. 

With compulsory invoicing of the tax, all the labored argu- 
ments as to percentage charge against net income fall to the 



84 SELECTED ARTICLES 

ground and the carefully worked out tables to prove an imaginary 
point become a joke. 

Nobody has the effrontery at any place or any time to say 
that there should be no sales taxes. The opponents of a 
general commodities overturn tax not only admit the necessity 
of a sales tax in some form, but they urge additions to the 
present long list of special sales taxes. In the same breath 
they gasp with horror at the idea of a consumption tax; they 
nearly strangle over the thought that the consumption tax is 
not a consumption tax at all but a tax on capital; they see 
endless confusion in arriving at gross receipts, and extreme 
simplicity in arriving at net income, although net income can 
be derived only from gross receipts. 

The very first line on the working schedule of every income 
tax blank — corporate, partnership, individual, fiduciary — calls for 
a statement of gross sales. The entire return from any mer- 
cantile or manufacturing operation is built up on that line. If 
the result set forth in that line is wrong, the whole complicated 
structure that follows must be wrong. All that is necessary 
for the collection of an overturn sales tax is that one line. 

There is no suggestion anywhere to abolish the income tax. 
The income tax cannot be collected without that one line on 
the return. How a dealer can so confuse his books as to make 
that line false for the overturn tax and fool-proof for the 
income tax is entirely beyond my imagination. The somewhat 
notorious report made by the National Industrial Conference 
Board Tax Committee declares that under a sales tax "new and 
complicated problems would arise in the definition of what is a 
sale." I have always been a dazed admirer of the dialectic 
sophistries with which that National Industrial Conference 
Board Tax Committee asphyxiated itself so much to its own 
satisfaction. I think this particular gem of auto-intoxication is 
worthy of unstinted admiration. I take off my hat to the ac- 
countant who can work out net income from one report of 
gross sales and can camouflage those same sales for purposes 
of a sales tax. 

It is unfortunate that advocates of a sales tax have allowed 
themselves at times to display peevishness. This does not blind 
me — a theorist only — to the equal injustice of the charge that 
advocates of an overturn tax are those "whose knowledge of 
taxation is limited and who are concerned solely in selfish 



TAXATION 85 

attempts to pass their burden on to others less able to pay." It 
does not justify Congressman Frear's accusations that because 
Otto H. Kahn "wabbled and wavered" over the subject of an 
overturn tax, his final decision in its favor was influenced by 
selfish motives. 

All of the backbitings are unworthy in a discussion of a 
big, elemental, vital question that concerns the welfare of every 
resident of the United States, and therefore of the United States 
itself. Why not get down to brass tacks? 

To get back, therefore, to the same brass tacks, if a druggist 
can compete with a fellow druggist in the sale of Pluto water 
at 40c. a bottle while compelling me to pay for a 2c. stamp as a 
tax, there is no reason why every dealer in every article of 
commerce cannot be made to collect a tax on his sales in the 
same manner. The main difference is that where goods are 
sold in bulk, as must be the case down to the retailer, the 
sales -sheets must show the transaction entire, and the invoice 
should be made to show the transaction with respect to each 
purchaser. There is nothing to force the druggist to sell the 
stamp to me. If he was not afraid I would preach, he might 
let me have the Pluto water for 40c. and forget the 2c. stamp. 
In the general process of distribution in bulk this forgetfulness 
could not be. 

Dr. Adams, while admitting the difficulty of administration 
of special taxes on medicinal articles, fountain drinks, and 
"luxuries," and even urging their repeal, still insists on the 
superiority of special taxes on selected articles of general con- 
sumption in preference to a general tax on all articles of con- 
sumption. Much as I respect Dr. Adams, I must differ from 
him. It is one of the annoying weaknesses of the present 
hodgepodge of sales taxes that no force of Treasury employees 
can ever check up the tax properly. The constantly reiterated 
assertion of Dr. Adams that a simple, omnibus overturn tax 
would impose added confusion on top of a present confusion 
which it is intended to abolish is one of those things no fellow 
can understand. 

Another of Dr. Adams' obsessions is that an overturn tax 
would favor large multiple process concerns as opposed to a 
series of single process concerns. As against Dr. Adams' theory 
I would give far greater weight to the testimony of practical 
business men. Charles E. Lord, one of the largest cotton 



86 SELECTED ARTICLES 

manufacturers in the United States, ought to know something 

about his own business. He says: 

Multiple process concerns and single process concerns at present 
exist side by side in the same line of business. Each has its reasons 
for being. The multiple process concern has certain advantages and dis- 
advantages. It may own sources of raw material, save the profits of 
intermediary processes, save transportation charges, etc. On the other 
hand it is clear that in large organizations the overhead and administra- 
tion charges are greater than in small units, the immobility of the business 
is greater, often the proportion of the capital not invested in immediately 
productive sources larger, so that the balance of advantage frequently 
rests with the single process concern where the product is specialized. 
The existence of both classes of concerns is due to deep fundamental 
causes on which so superficial a factor as a i per cent tax on sales will 
have no appreciable bearing. 

Mr. Lord finds that in the case of single process concerns 
whose completed products reach the consumer to say $4.50, the 
combined tax from that on the raw cotton handled twice (by 
grower and factor), on the spinning, the dyeing, the weaving, the 
jobbing and the retailing is 12 2 /sz., or less than 3 per cent of 
the consumer's price. In the case of the single process concern 
the saving in tax would be about ic, or less than ^ of 1 per 
cent on the final price. 

In the case of the wood pulp industry the total competitive 
difference between a large organization owning its mines and 
forests, making its own chemicals and carrying on every process 
up to the finished paper, and single process concerns buying 
wood pulp and manufacturing paper is only about % of 1 per 
cent. Similar figures are reached in other lines of business 
which have been examined. 

Practical considerations like these ought to lay the ghost of 
monopoly fostered by encouragement of combinations through 
an overturn tax. 

Another bugaboo is the newsboy, the corner fruit man, and 
the small farmer. How, it is asked, are you going to keep tab 
on them? You don't have to. It is proposed to differentiate 
this overturn tax, which is intended to be practical, from im- 
practical taxes like some of those now on the statute books. 
That can be done by relieving from responsibility, as collectors 
of the tax, vendors who do not sell more than $500 worth of 
goods in a month or $6,000 in a year. If the poor newsboy or 
small tradesman has an overturn of $500 or more in a month, 
it is high time that some method be found to force him to 
keep track of his business by keeping at least a cash book. It 
is safe to say that the resultant benefit to him would be far 
greater than the cost to him of the tax. As for the poor 



TAXATION 87 

farmer who sells less than $6,000 of produce in a year, it is 
difficult to feel deep sympathy for the hardship of the tax on 
him. He not only should, but I venture freely to say that he 
would, get the same price for his wheat as his neighbor who 
sold $10,000 worth. The only difference is that he would not 
have to turn in to the government the 1 per cent collected from 
the elevator company. 

A representative of the Federation of Farm Bureau Asso- 
ciations writes me that the farmer could not collect the tax 
from the elevator company because the price of wheat is made 
in Liverpool, that he could not add a sales tax to export com- 
modities and neither could he add it on a falling market. As 
a matter of fact probably no farmer even sells his wheat 
directly for export. If he did he would possibly be relieved 
from collecting that tax from his customer, in which case he 
would have exactly the same net returns as though he sold it 
to an elevator company and collected a 1 per cent tax. If Mr. 
Ford sells a Michigan mule to me for $650 and I sell it in 
Canada, Mr. Ford bills the 5 per cent tax to me regardless of the 
destination of the mule. So also if he reduces the price from 
$650 to $510 he continues to bill and collect the 5 per cent. 

What can be done with one article on one sale can be done 
with many articles on many sales. What can be done with an 
excise tax on ice-cream soda sold to me, or with a tariff tax on 
coffee, can be done with any article sold by anybody to anybody, 
only it can be done much more simply and efficiently and justly. 

The same farmer authority — one of Congressman Frear's 
fifteen ablest men who have ever studied the tax question — 
assures me that when a farmer sells his goods for less than 
cost he impairs his capital. Quite obvious. But if wheat at $2 
a bushel results in impairment of capital without any sales tax, 
wheat at $2.02 a bushel with a compulsorily collected sales tax, 
results in no greater impairment. The tax comes from the 
purchaser, not the seller. The competition to sell and the loss 
of capital on an undercost sale are exactly the same with or 
without the tax. 

Are not the words "sales tax" a convenient misnomer? In 
effect, with a compulsory invoicing, the tax is really a purchase 
tax. To the extent that the middleman adjusts his price with 
relation to cost, just as he would do were there no tax, he 
makes or loses money, but the tax has no more to do with his 



88 SELECTED ARTICLES 

decision to sell at a loss than the labor or freight or rental 
charge. In fact it has far less to do with it because it is smaller, 
and it is measured as a cost, entirely by his purchases, and not 
by his sales. 

Another screen of underbrush has been cultivated by advo- 
cates of a sales tax who talk about it as a substitute for the 
excess profits tax. It is nothing of the kind. It cannot be, in 
the very nature of things. In so far as an overturn tax, by an 
equitable and systematic distribution of the consumption tax 
burden, could without injustice produce more net revenue than 
is produced by the present chaotic sales taxes which it is 
designed to replace, it would relieve the income tax situation. 

The excess profits tax is really nothing more nor less than 
a surtax on corporations, balancing roughly the surtax on 
individuals. Both the excess profits tax and the individual 
surtaxes are higher than their productivity point. General 
consensus now appears to be that 32 per cent or 33 per cent is 
about the maximum productivity point of individual surtaxes. 

The problem with respect to corporation taxes is to find the 
corresponding point and method. It is an entirely different 
story. It has nothing to do with an overturn sales tax, except 
as rates of income tax may be adjusted to the productivity of 
the sales tax. 

The real question with respect to the overturn tax is whether 
or not it would be more simple, more just, more easily admin- 
istered, more productive, than the present chaotic sales taxes, 
with prospect of additional chaos and added injustice following 
an addition to the list of arbitrary levies. To that I can see 
only one answer — Yes. 

I have directed my remark chiefly to administrative objec- 
tions. I have assumed that this gathering would agree to the 
broad proposition that if it were— as I am sure it is — possible 
to administer an overturn sales tax and make it just what it 
ought to be — a consumption tax — there would be no objection 
to the general principle. 

The general principle itself is also simple : 

It would provide a base for a large portion of the govern- 
ment revenue more tangible than profits and income; not a base 
necessarily larger than the present base of special sales taxes, 
augmented by still more special taxes, but a base firmly deter- 
mined in equity to all. 



TAXATION 89 

It would rest fairly as between citizens. The one who con- 
sumes the most and spends the most would pay the most in 
this particular tax. 

It would not be a special tax on the ma.i who must buy 
medicine for his children or on the stenographer who buys an 
ice-cream soda for her luncheon. 

Why should a baby pay a specific tax on its medicine for 
colic? 

Why should a man pay a specific tax on a bottle of liniment 
for a sore toe? 

Should a person when he is ill pay a specific tax and not pay 
a general tax when he is well? 

The existing excises tax the motor truck, but not the horse- 
drawn vehicle doing the same work; they tax the fur coat of 
the farmer and lumberman which he can scarcely do without, 
but not a cloth coat which for many uses is less desirable; and 
they tax the piano necessary for the child to obtain its proper 
musical education, or the band instrument with which he may 
later earn his living, but not the toy with which he amuses 
himself. 

It would encourage thrift instead of waste. If you don't buy 
a silk shirt, you do not pay the tax. If you do buy a yacht, you 
do pay the tax. 

It could not increase the price of commodities beyond the 
amount of the tax itself. 

It would be simple in collection and auditing for both 
government and taxpayer — or more properly, in the latter case, 
the drafted tax collector. 

It would bring the collection of a substantial part of the 
revenue up to date. 

It would be sure in its incidence, simple in its application, 
economical in its collection, and would have all the attributes 
of just taxation. 

When this base has been supplied, you can adjust your 
individual and corporate income tax rates to fit the situation 
and maintain the proper balance. 

SALES TAX EXPERIENCE 1 

The critics and opponents of the sales tax would win a 
better hearing if they offered any preferable alternative and if 

1 Editorial. New York Times. May 14, 1921. 



Oo SELECTED ARTICLES 

they did not claim too much in their favor from the experience 
of other countries. It approaches false witness to say that the 
sales tax is disliked or is unsuccessful in the Philippines. All 
taxes are disliked everywhere, and it is impossible to imagine a 
perfect substitute; but in the Philippines the sales tax is liked 
better, or rather is disliked less, the longer it is collected. France 
is not collecting what was expected from its sales tax, but it 
is retained in the budget, and it is not criticised there on the 
points which its opponents make much of here. The fault may 
lie equally with an optimistic estimate of the yield of an untried 
and novel tax, or with depression of trade for reasons effective 
everywhere, and not particularly where there is a sales tax. 
Too many French taxes are disappointing under present con- 
ditions to condemn any one tax in particular because of its 
specific defects. The introduction of the Canadian budget is 
particularly embarrassing to those who have emphasized the 
Dominion sales tax experience as a warning against our follow- 
ing the example. 

Canadian budgeteers think so highly of the sales tax that 
they increased it in their budget this week. The Canadian sales 
tax is not a general turnover tax, but is confined to traders — 
manufacturers, wholesalers, jobbers, importers, and not includ- 
ing retailers. This intertraders' tax of I per cent is increased 
to i% per cent. The 2 per cent tax on sales by manufacturers 
to retailers, or directly to consumers, is also increased by half 
to 3 per cent. Exemptions are foodstuffs in natural state and 
first sales of products of farms, fisheries, mines and forests. 
As Canada produces many articles which also are imported, the 
customs is made 1 per cent above the sales tax. In presenting 
the budget Sir Henry Drayton did not even refer to objections 
to the sales tax and was rather apologetic that he did not 
accept many suggestions by Boards of Trade and commercial 
bodies to make the sales tax of broader application. The budget 
speech does not itemize the sales tax proceeds, but the Dominion 
press mentions $100,000,000. A good epitome of Canadian 
opinion was given by a Canadian, J. F. M. Stewart, at the recent 
meeting of the United States Chamber of Commerce in Atlantic 
City: "The sales tax was well received by the people of Canada. 
It has not proved burdensome, nor an undue handicap on our 
commercial activities. It is simple in its application, easy and 
cheap to collect, and it is productive of substantial revenues." 



TAXATION 91 

Senator Smoot's sales tax bill is so much more inclusive 
than the Canadian bill, and our volume of trade is so much 
greater, that his estimate of a yield of $1,250,000,000 is reason- 
able, even moderate. The exemptions in our proposed sales tax 
include all businesses of less than $6,000 a year. Below that the 
tax would be small and disproportionately difficult of collection. 
Above that better accounts would be kept. Of course, every- 
body would prefer that there should be no sales tax, or that 
there should be a better tax. Who suggests one, or doubts that 
there must be a tax to support the nation's expenditures? What 
tax could be expected to enjoy a more general endorsement by 
business men than the sales tax has received? And when the 
interested opposition is separated from the rest, how small and 
theoretical is the remnant! 



PROPOSED SALES TAX 1 

I desire to take a few moments of the Senate's time this 
morning for the purpose of explaining briefly the provisions of 
the sales tax bill which I have introduced, known as Senate bill 
202, which I hope may become a part of the revenue laws of 
our country. For the Record and as a part of my speech I 
send to the desk a copy of the bill and ask that it be printed 
in the Record without reading. 

Be it enacted, etc., That this act may be cited as "The sales tax act, 
1921." 

Title I. — General Provisions. 

DEFINITIONS. 

Sec. 2. That when used in this act — 

The term "person" includes individuals, partnerships, corporations, and 
associations; 

The term "secretary" means the Secretary of the Treasury; 

The term "commissioner" means the Commissioner of Internal Rev- 
enue; and 

The term "collector" means collector of internal revenue. 

Title II. — Sales Tax. 

Sec. 201. That in addition to all other taxes, there shall be levied, 
assessed, collected, and paid upon all goods, wares, or merchandise sold 
or leased on or after July 1, 1921, a tax equivalent to 1 per cent of the 
price for which so sold or leased; such tax to be paid by the vendor or 
lessor.. 

Sec. 202. (a) That this title shall not apply to sales and leases made 
during any year in which the total price for which the taxable sales and 
leases are made does not exceed $6,000. 

1 Speech of Senator Reed Smoot. Congressional Record, April 27, 192 1. 



92 SELECTED ARTICLES 

(b) In computing the tax due under this title every taxpayer shall 
be entitled to an annual exemption of $6,000. 

(c) In any case where the full amount of the exemption is not 
claimed in computing the tax due for the first quarter, the part not so 
claimed shall be deducted in computing the tax due for the second quar- 
ter or succeeding quarters. For the purpose of this act the first quar- 
ter shall be the months of July, August, and September; the second 
quarter, the months of October, November, and December; the third 
quarter, the months of January, February, and March; and the fourth 
quarter, the months of April, May, and June. 

(d) The taxes imposed by this title shall not apply to sales or leases 
made by (1) the United States; (2) any foreign Government; (3) any 
State or Territory, or political subdivision thereof, or the District of 
Columbia; (4) any mutual ditch or irrigation company; (5) any hos- 
pital; or (6) Army and Navy commissaries and canteens; or (7) any 
corporation organized and operated exclusively for religious, charitable, 
scientific, or educational purposes, or for the prevention of cruelty to 
children or animals, no part of the net earnings of which inures to the 
benefit of any private stockholder or individual. 

(e) The taxes imposed by this title shall not apply to sales or leases 
of articles taxable under Title VI or VII or paragraphs (1), (2), (3), 
(12), and (20) of section 900 of the revenue act of 1918. 

(f) Under such rules and regulations as the commissioner, with the 
approval of the secretary, may prescribe the taxes imposed by this title 
6hall not apply in respect to articles sold or leased for export and in 
due course so exported. 

Sec. 203. That in computing the taxes imposed by this title no credit 
shall be allowed for any tax reimbursed or paid in any manner to any 
person in connection with any previous transaction in respect to which 
a tax is imposed by law. 

Sec. 204. That every person liable for any tax imposed by section 201 
shall make quarterly returns under oath in duplicate and pay the tax 
imposed by such section to the collector for the district in which is 
located the principal place of business. Such returns shall contain such 
information and be made at such times and in such manner as the com- 
missioner, with the approval of the Secretary, may by regulation pre- 
scribe. 

The tax shall, without assessment by the commissioner or notice from 
the collector, be due and payable to the collector at the time so fixed 
for filing the return. If the tax is not paid when due, there shall be 
added as part of the tax a penalty of 5 per cent, together with interest 
at the rate of 1 per cent for each full month from the time when the 
tax became due. 

Sec. 205. That in the case of an overpayment of any tax imposed by 
this act, the persons making such overpayment may take credit therefore 
against taxes due upon any quarterly return. 

Sec. '206. That the commissioner with the approval of the secretary, 
is authorized to make all needful rules and regulations for the enforce- 
ment of the provisions of this act. 

The commissioner with such approval may by regulation provide that 
any return required by this act to be made under oath may, if the amount 
of the tax covered thereby is not in excess of $10, be signed or acknowl- 
edged before two witnesses instead of under oath. 

Sec. 207. That on and after July 1, 1921, sections 628, 629, 630, 902, 
904, 905, 906, 907, and 900, except paragraphs (1), (2), (3), (12), and 
(20), are repealed, except that such sections shall remain in force for the 
assessment and collection of all taxes which have accrued thereunder and 
for the imposition and collection of all penalties which have accrued and 
may accrue in relation to any such taxes. 

Mr. President, I have given considerable study to the wisdom 

of enacting into law a general sales tax, and now present three 

alternative propositions as a basis for such tax which, stated 

briefly, are as follows : 



TAXATION 93 

i. A rate of Yz of I per cent, but not to exceed i per cent, 
on all sales without distinction of integrated or unintegrated 
concerns. 

2. A rate of 24 of I per cent, but not to exceed 1^2 per cent, 
with a credit for taxes previously paid on goods bought for 
resale. 

3. A rate of 1 per cent, but not to exceed 2 per cent, without 
distinction of integrated or unintegrated concerns, but exempting 
each dealer on the first $50,000 of annual sales. 

For simplicity of administration and collection of the tax, I 
have concluded to support the first-named plan, and for the pur- 
poses of this bill have specified a rate of tax of 1 per cent. If at 
any time the amount to be raised from such a tax is to be re- 
duced or increased, the only amendment required to the law 
would be to change the rate of tax. 

The bill I have offered follows closely the provisions of the 
Philippine sales tax, which today is the most satisfactory tax 
to all classes and the most productive that is imposed in the 
islands. 

I now ask the attention of Senators to a brief explanation of 
the principal provisions of the bill. Later, when the revision of 
the revenue laws is before the Senate, I shall take pleasure in 
discussing it in detail. 

1. What Is a General Sales Tax? 

A tax on the gross value of goods, wares, and merchandise, 
whether raw material or manufactured or partially manufac- 
tured products, whether of domestic or of foreign origin, and 
such as are generally sold or exchanged and delivered for domes- 
tic consumption, whether in barter or on a cash, credit, or install- 
ment basis, which tax shall accrue at the time of sale or lease of 
all such goods, wares, and merchandise, at the rate of 1 per cent 
of their total value at the time of such change of ownership. 
This tax also applies to the total amount or amounts received on 
all leases of goods, wares, and merchandise. 

The 1 per cent sales tax is similar to an overhead charge, to 
be added to the cost of the goods and finally paid by the ulti- 
mate consumer, but there is nothing in the bill to prevent the 
seller of the goods from absorbing the 1 per cent charge, and 
that no doubt will be done with many establishments where 
their sales profits are large. 



94 SELECTED ARTICLES 

2. What Are the Proposed Exemptions? 

All sales and leases are exempt from this tax when made by— 
i. The United States or by any State or Territory, or politi- 
cal subdivision thereof, or by the District of Columbia, or by 
any Army or Navy commissary or canteen. 

2. By any foreign government. 

3. By any mutual ditch or irrigation company. 

4. By any hospital or by any corporation organized and 
operated exclusively for religious, charitable, scientific, or 
educational purposes, or for the prevention of cruelty to chil- 
dren or animals, no part of the net earnings of which inures to 
the benefit of any private stockholder or individual. 

Sales and leases of the following goods, wares, and merchan- 
dise shall also be exempt from this tax : 

1. Such as are sold or leased for export and in due course 
are actually exported. 

2. Such as are subject to the taxes imposed in Titles VI 
and VII of the revenue act of 1918; i.e., beverages, cigars, 
tobacco, and manufactures thereof. 

3. Such as are subject to the taxes imposed in paragraphs 
(1), (2), (3), (12), and (20) of section 900 of the revenue act 
of 1918; i.e., automobiles, automobile trucks and wagons, motor- 
cycles and tires, parts, and accessories; dirk knives, stilettos, 
and so forth; yachts, motor boats, and so forth, to be used as 
pleasure boats. 

4. Total sales and leases on goods, wares, and merchandise 
which in any taxable year do not exceed $6,000. 

3. What Are Its Advantages When Compared With Other 
Taxes? 

1. Its extreme simplicity of assessment and collection. 
The employment by the taxpayers of costly tax experts is quite 
unnecessary as is the burdening of the tax administrative 
machinery with complicated, expensive, and long-drawn-out 
audits causing long delays in the collection of taxes. It is not 
inquisitorial; it does not raise difficult questions about losses, 
depreciation, and the like; it is more easily allocated among 
competing jurisdictions than a tax upon net income. No reve- 
nue defrauder in the Philippines ever claimed ignorance of the 
law in palliation of his offense. 



TAXATION 05 

I notice in the morning paper today a dispatch from Buffalo, 
N. Y., reading as follows: 

MADE INSANE BY TAX BLANK WOMAN FEARED STORE WOULD BE SEIZED FOR 

ERROR IN REPORT 

buffalo, N.Y., April 26. 

Papers filed in the county clerk's office here today state that Ethel J. 
Mahan, owner of a grocery store, became so worried over fear that the 
Government would confiscate her business because of possible errors in 
her income tax report that she lost her mind. 

The woman was committed to the State hospital for the insane by Act- 
ing County Judge Ottoway. 

At some future time, Mr. President, I want to go into this 
question more in detail. 

2. Each taxpayer pays out of his gross income his sales tax 
and automatically grades the amount according to his ability 
to pay; this grading is far more exact, scientific, and equitable 
than are the artificial steps or brackets imposed by the net 
income-tax system of existing revenue laws. Under a sales 
tax the taxpayer pays as he goes along and does not feel the 
burden, while under the existing revenue law hundreds of 
thousands of income taxpayers are today, when reduced in- 
comes are the rule, greatly harassed by the payment of taxes 
which accrued a year ago when incomes and profits were greatet 
than they are today. 

3. The tax rate is low and uniform on all goods, wares, and 
merchandise. The fact that it applies alike to all mercantile 
transactions makes possible for greater productivity, together 
with a low tax rate. The absence in the Philippines of dis- 
criminatory tax rates leaves all taxpayers satisfied (1) because 
all pay the same rate, and (2) because goods sufficiently similar 
to be competitive, even though not identical, are taxed alike. The 
high discriminatory tax rates imposed under existing revenue 
laws appeal to the tax payers as extremely unfair and are 
resented by them. This is the main cause why the tax admin- 
istration has thrown up its hands, recommending the repeal 
of some of these consumption taxes, because they say they are 
easily evaded and too costly to collect. 

4. The taxpayer can tell to a cent and with absolute cer- 
tainty and with a minimum of effort at the close of business 
each day exactly where he stands as to profits and tax liability. 
Under the complicated existing excess-profits tax the tax- 
payer never knows, to a certainty, what amount of profit he 
has to add to his business to come out whole. Naturally he 
adds all he thinks necessary, and experience has demonstrated 



96 SELECTED ARTICLES 

that in many cases he has doubled or trebled the amount, all 
of which inevitably results, as the goods pass along to the ulti- 
mate consumer, in a pyramiding of prices. An investigation 
made by the Department of Justice in connection with the 
Lever Act tended to show that as a direct result of the unwise 
and complex provisions of the excess profits law the prices of 
certain commodities to the ultimate consumer were increased 
over 23 per cent. A simple, sane, intelligible sales tax. at a rate 
of 1 per cent, even though pyramided several times, would 
nevertheless be but a fraction of 23 per cent and would certainly 
result not in an increase but in a substantial reduction of the 
present high prices of necessities. 

4. What Other Taxes in the United States Does Its Method 
of Operation and Accumulation Resemble? 

1. Customs duties on imports. Even though the customs 
duty is not repeated on each turnover of imported goods on 
their way from the importer all the way through various 
middlemen, still the effect on the ultimate consumer of the 
pyramiding of the various profits on the values, both of the 
costs of the goods and of the customs duties, is usually several 
times as great as is the accumulation of the sales taxes. The 
customs duties usually begin with a high specific or ad valorem 
rate; therefore the final tax content of the cost of the goods 
to the ultimate consumer is several times as great as a 1 per 
cent sales tax can never reach, even with half a dozen turn- 
overs. But American consumers during many years have be- 
come so accustomed to the high customs duties and to their 
manner of accumulation that now they seldom remember that 
they are paying highly compounded duties whenever they buy 
imported goods. 

2. Tobacco products, beverages, etc., paying high excise or 
luxury tax rates. The same remarks apply in this case as in 
the matter of the accumulation of customs duties in the pre- 
ceding paragraph. 

3. Personal property taxes for local purposes, imposed peri- 
odically by city and state governments, on goods, wares, and 
merchandise on the shelves and in the warehouses of merchants 
and manufacturers. The tax rates in these cases are usually 
about the same rate as is the sales tax rate, though often in 
some localities much greater. This tax is collected on 



TAXATION 97 

merchants' stock of goods before they are sold. The sales tax 
would be collected on identically the same goods at the time 
of their sale and not before. Surely the merchant and manu- 
facturer are better able to pay their taxes when they have made 
a sale and have the money than they would be on a lot of dead 
stock. 

5. What Have Its Results Been in the Philippines During the 
First Sixteen Years of Its Operation ? 

1. It has become the most productive item in the insular 
tax system. 

2. It has not hampered any type of business or manufac- 
ture in the island; it is precisely during the life of the sales tax 
law that commerce and industry of all kinds have thrived as 
never before. 

3. The Philippine Government is enthusiastic over the 
results of the sales tax and so cabled the Secretary of the 
Treasury in Washington four months ago, stating that their 
sales tax was the "most equitable, productive, simple, and 
economical" tax they had; that the original tax rate of Yz 
of 1 per cent had been increased to a full 1 per cent; and 
that the Philippine Government was then (December, 1920) 
considering the advisability of again increasing the tax rate, 
this time from 1 per cent to 2 per cent per turnover. 

4. Prominent merchants with offices in Manila and New 
York City have in printed statements been equally as enthusi- 
astic over the operation of the sales tax law as is the Philip- 
pine Government, as quoted in the foregoing paragraph. In- 
dustrial and commercial methods and conditions in the Philip- 
pines have, during the last twenty-two years, become thoroughly 
Americanized as scores of reputable witnesses — formerly in the 
Philippines and now in this country — are willing to testify. All 
of which should be sufficient to prove an error in judgment on the 
part of those in this country who have, on scant knowledge of 
their own, condemned the Philippine sales tax as being in prin- 
ciple rank economic heresy and in operation impracticable. 

6. Where Does Its Final Incidence Normally Rest? 

Normally, the entire taxes paid on each turnover are shifted 
and rest finally on the ultimate consumer, this because the 
purpose of all business is profit and the cost of goods includes 



98 SELECTED ARTICLES 

every item of expense such as raw material, labor, freight, rent, 
traveling expenses, interest, selling expenses, losses, and taxes. 
All of these items are normally shifted to the ultimate con- 
sumer. It can be demonstrated with mathematical accuracy 
that even with a half a dozen turnovers, and the corresponding 
i per cent taxes, the price of commodities to the ultimate con- 
sumer is very rarely increased over 3^ per cent. Compare this 
with the 23 per cent increase resulting from the operation of 
the excess-profits tax. The 2^4 or 3^ per cent tax content in 
commodities bought by the ultimate consumer means that a 
lot of goods which, sales tax paid, cost him $102.50 to $103.50 
would, without the tax, cost only $100. But as a matter of fact 
the sales tax encourages thrift and eliminates the 23 per cent 
which the operation of the excess-profits tax now loads on many 
commodities. Therefore the net result of a moderate general 
sales tax would be a considerable reduction to the ultimate 
consumer in the value of the $100 worth of goods in the example 
given above. 

Compared with the merchants' and manufacturers' ordinary 
profits on each turnover of goods, the 1 per cent sales tax is 
so small that it was found, after many years' experience in the 
Philippines, that normally in ordinary commercial transactions 
very little attention was paid to the tax. Under abnormal 
conditions, where the profits were larger than usual the sales 
tax was absorbed. 

7. How Does It Affect the Independent Manufacturer as 
Compared With the Integrated Multiple-Process Concern? 

For an intelligent comprehension of this problem several fac- 
tors must be considered: 

1. As a rule, the integrated concern produces its own raw 
material at a minimum cost or pays less for its raw-material 
purchases in bulk than do its small competitors. 

2. It is generally thought that the integrated concern be- 
cause of its production in bulk, more economical machinery, 
smaller overhead expense per unit and multiple process from 
raw material to finished product, turns out goods at a lower 
cost than do its smaller competitors. 

Per contra it is well known: 

1. That not all independent manufacturers do business on 
a small scale, and 



TAXATION 99 

2. That independent manufacturers who specialize on cer- 
tain finished products are able to compete successfully with the 
bulk production of large integrated concerns manufacturing the 
same finished products. 

3. That the activities of many concerns, such as automobile 
manufacturers, consist mainly in assembling parts manufac- 
tured by several integrated or independent concerns. 

For the purpose of this argument, we are to consider how a 
1 per cent sales tax on final output affects (1) a large integrated 
concern with, say, six multiple processes between the raw mate- 
rial and the finished product as distinguished from (2) a half 
dozen independent concerns, each performing one of the six mul- 
tiple processes, performed by the integrated concern, and each 
paying a 1 per cent sales tax on their output of the partially 
manufactured product. 

The natural assumption would be that the six independent con- 
cerns among them would pay six times the amount of sales tax 
that the integrated concern would pay on the same output. But 
this assumption would be wrong, for the following reasons : 

a. Each of the six independent concerns would shift along 
to the next independent manufacturer in line all of the original 
costs of raw material plus the various costs at that stage of the 
partially manufactured product plus his own profit and the com- 
pound profits of the manufacturers who had preceded him and 
add the 1 per cent turnover tax to the bulk sum of all these items. 
The total of these six profits en route would make the finished 
product to the ultimate consumer several times the amount for 
which the first independent manufacturer purchased the raw 
material. Therefore, instead of 6 per cent — 1 per cent on each 
turnover- — the tax content of each dollar the ultimate consumer 
paid for a finished product would, normally, range between 2%. 
per cent and s x / 2 per cent. 

b. The integrated, multiple-process concern would add 
merely the cost of production in each of its processes to the 
partially manufactured goods entering the next process and add 
to the total cost its profit, together with 1 per cent of the 
total sale price of the finished product, which is normally sold 
in competition with and at approximately the same price as 
similar finished products are sold by the last one of the six inde- 
pendent manufacturers. 

Therefore, the advantage which the large integrated concern 



ioo SELECTED ARTICLES 

would have over each of the independent concerns would be from 
% to }£ of I per cent— that is, 2 J / 2 per cent or zVi per cent 
divided by 6. But as independent manufacturers, large and 
small, have thrived and continue to thrive alongside of large 
integrated multiple-process concerns the natural assumption is 
that they will continue to thrive, regardless of a fraction of i per 
cent advantage. Whether this advantage will be used is doubt- 
ful. So far the large concerns have shown no disposition to 
drive their small competitors out of business. No doubt the 
large manufacturer is more than satisfied to allow his small 
competitor to set the price. 

Logically competition and the sales tax would result in an 
increase of I per cent or 2 per cent or 3 per cent to the ulti- 
mate consumer, and the repeal of the excess-profits tax would 
result in a decrease to the ultimate consumer of several times 
that amount. As for the small independent manufacturer and 
the large integrated multiple-process concern, they should con- 
tinue in the future, as they have in the past, to operate along- 
side of each other. 

The following table shows how a year ago a suit of men's 
clothing, retailing at $60, would increase in value from the 
raw material to the finished product. 

By the way, if the same suit of clothes were manufactured 
today, with wool at its present price, there would be a differ- 
ent result from that shown by this table: 

1 per cent tax. 

1. Raw wool in grease, about $6.50 $0,065 

2. Wool dealer scours wool and sells to spinner, $8 08 

3. Spinner converts into yarn and sells yarn to the manufac- 

turer $10 •- -io 

4. Manufacturer weaves and finishes into cloth and sells 3% 

yards at $4 *333 

5. Trimmings, linings, etc., 50 per cent of cloth 1891 

6. Tailor makes into suit and sells at $40 40 

7. Suit is sold at retail for $60 60 

Total tax price on consumption $1.5674 

If the sales tax bill becomes a part of the revenue laws of our 
country Congress can repeal not only the items provided for in 
the bill as presented by me, but can repeal all of the irritating, 
nagging, discriminatory taxes amounting to hundreds of mil- 
lions of dollars, and the excess-profits tax, the result of which 
has worked such havoc with the business concerns of our 



TAXATION 101 

country, which have in many cases been compelled to pay the 
excess-profits tax on paper profits. 

I have received a few letters of complaint against a general 
turnover tax from concerns doing business on an average of 
2 per cent to 3 per cent profit on their turnover sales and 
claiming that if the 1 per cent sales tax is imposed it would 
ruin their business. Perhaps in some cases the imposition of 
the tax, if it had to be paid by the merchant, would seriously 
cripple their business; but such concerns must understand that 
the tax imposed is to be paid by the purchaser. It is to be 
added to the regular price charged for all goods sold. If the 
merchant desires to absorb the tax there is no objection to his 
doing so, but the law does not contemplate any such result. 

Some day not far distant America will have a general sales 
tax law; and with new forms of pensions and bonuses that will 
become a heavy drain upon the Treasury, together with the 
2.y 2 per cent sinking fund for retirement of the public debt and 
nearly $1,000,000,000 of interest to be paid annually upon the 
Government obligations, the sooner a general sales tax bill ' is 
enacted into law the better it will be for America. 

Congressman Mondell repeatedly announces that the House 
of Representatives will demand a lifting of taxes and not a 
shifting of them. I want both a lifting and a shifting of 
taxes, and I know the American people want the same. The 
expression "consumption taxes" scares the politician much 
more than it does the American taxpayer. Every internal tax 
imposed is a consumption tax. The demagogic cry of the 
unloading of the taxes now supposedly placed on the shoulders 
of the rich onto all the working population of the United States 
through a sale tax on goods, wares, and merchandise is a 
theory and not a fact, and theories never have and never will 
be accepted as payment for taxes that must be collected to 
maintain the Government. I declare in the most positive terms 
that it is such people of the United States that are now paying 
the taxes, and it will continue so no matter in what form the 
-tax is imposed, unless it be a tax taking part or all of the 
capital or property of certain classes of citizens. 

Many of the taxes imposed under the present revenue laws 
are disguised and heavily inflated consumption taxes, and when 
finally paid by the consumer result in an ever-rising cost of the 



102 SELECTED ARTICLES 

necessities of life. They have promoted extravagance and 
inflation, restricted competition, obstructed the development of 
our natural resources, discriminated between taxpayers, and are 
next to impossible to administer. 



BRIEF FILED WITH THE TAX COMMITTEE OF 

THE NATIONAL INDUSTRIAL CONFERENCE 

BOARD 1 

Recognizing that the fundamental causes for existing high 
prices and high wages are currency and credit inflation and the 
destruction of property of every character through war, and 
that social and industrial unrest are a consequence, as those 
symptoms usually accompany periods of inflation, the remedy 
lies in a higher interest rate and more discriminating loaning 
of funds by bankers and an increase in productive effort by 
the people to promote deflation in the direction in which the 
inflation has been caused by the factors referred to. 

Another, however, and major contributing cause to the 
present exalted prices and high cost of living is the method of 
Federal taxation, whether in the form of excess profits tax 
on corporations or the heavy surtaxes on the income, particularly 
the earned income, of individuals, both having exactly the same 
relation to and effect in causing high prices, and the measure 
of inflation due to such taxes can only be removed by a change 
in our method of taxation. 

To first indict the existing method so that we may determine 
what to avoid and what to seek: 

It bases the bulk of the government revenue on something 
highly variable and intangible — profits and income. 

It is not producing sufficient revenue at present, and is likely 
to produce less in the future. 

See reply to U. S. Steel Corp. showing- Federal tax 19 18 $274,000,000; 
Federal tax 19 19 $52,000,000; loss of revenue to government $222,000,000; 
only partly accounted for by difference in rate. 

The high surtaxes on individual incomes are driving those of 
large income into tax exempt securities. 

The buying of municipal bonds and like securities on a large scale is 
diverting capital from necessary productive enterprises into channels where 
only further waste and extravagance is being created. 

The rapidly rising surtaxes on all but the most moderate 
1 By Charles E. Lord, April 16, 1920. 



TAXATION 103 

incomes is preventing the accumulation of savings available 
for investment in the further expansion of productive enter- 
prises. 

It discourages competition. No man is going into a new 
enterprise unless there is a chance for a profit which more than 
offsets the risk. He knows today that if there is a high profit 
the government takes perhaps half of it in taxes, while if the 
venture is unsuccessful he must bear all of the loss himself. 

Those already in business are content to keep on because the fea- 
tures of the tax by discouraging competition and eliminating supplies 
enables existing concerns to pass the tax along to the consumer. 

The utilization of natural resources is penalized, as, for one 
thing, the cutting of timber. 

An individual who bought timber land a few years ago for $100,000 — 
$50,000 on mortgage and $50,000 capital investment — and whose timber 
if cut might now bring $400,000, cannot cut it without paying a large 
portion of the profit to the government in taxes, while so long as the 
timber stands uncut he pays no tax. 

It encourages extravagance in business conduct, high salaries, 

wasteful methods, unnecessary expense, because the money saved 

by care in these matters would be largely taken away in taxes. 

Careful management is no longer able to reap its customary reward. 

It favors overcapitalized and extravagantly managed business 
as against the conservatively capitalized and carefully managed 
one. 

It is costly to collect, expensive alike to the government and 
the taxpayer, and withdraws from productive employment tens 
of thousands of clerks and accountants at a cost of millions of 
dollars. 

It rests unfairly as between taxpayers and works injustice 
and creates a sense of bitterness and wrong. 

Consider three men, A, B and C, all receiving the same income in a 
given year and paying the same amount of taxes. "A" is an inventor, 
who perhaps after several years of struggling has finally succeeded in 
interesting capital and selling his invention for $200,000. He pays the 
government between surtaxes and normal tax nearly one-half the amount 
received, and has parted with his invention, the thing which brought him 
so big a return in one year. "B" is a business man who on a capital 
of $500,000 employed in a business with a rapid turnover has made $200,000 
and, as in the instance of the inventor, paid almost half of it in taxes. 
"C" is a capitalist with $4,000,000 capital invested at 5 per cent, realizing 
an income of $200,000 without personal effort and paying the same tax 
as "A" and "B." At the end of the year "A" has parted with his in- 
vention; "B" has added slightly to his capital and still must bear the 
risks of business; while "C," the wealthiest of the three, remains with 
his capital unimpaired in a position to keep on earning him the same 
amount of income. 

Because of its character and also because it is an undeter- 
mined and indefinite tax it unduly increases the price of com- 
modities. 



104 SELECTED ARTICLES 

A manufacturer or merchant has to consider these factors: Federal 
taxation, depreciation, dividend or profit, and reserve, all of which must 
be covered in the margin between cost and selling, and so each factor has 
its influence in fixing prices. At present, doing business on an inflated 
basis has an element of unusual risk, and larger reserves than usual are 
required if the merchant is to remain solvent and meet his obligations 
during the period of deflation. The effort to build up such reserves, 
however, is met by the factor of taxes, which increase with the profit, 
so that in' order to get an adequate reserve he must be prepared to pay 
a heavy tax, the addition of which broadens the apparent margin of 
profit and lifts prices markedly without any net improvement to the mer- 
chant except a slightly larger insurance against a very definite risk. 

It tends to perpetuate and accentuate the present inflated 
situation. 

It keeps the taxpayer at all times from three to fifteen 
months in debt to the government. 

There exists today a fear among business men of a bad year following 
a good year with the heavy taxes incurred by the profits of the good year 
having to be met out of the meagre returns of the succeeding poor year 
with the additional possibility that such profits of the preceding year may 
have been subsequently very large swallowed up by losses. 

It is un-American in principle in that it seeks to make one 
citizen pay more, proportionately, than his neighbor, and attempts 
to tax endeavor for the purpose of rewarding those who do 
not make endeavor, and so creates special privilege. 

Why was such a method of taxation adopted? I should 
say, partly because under the sudden emergency of war the 
existence of a moderate income tax provided the machinery for 
increasing the burden so as to raise a very large revenue. The 
means was at hand and was used. The emergency, however, is 
past and we should promptly discard a theory of taxation which 
is both so uncertain and working so many evil results, and 
should seek a method which will be surer in its incidence, more 
equitable in its operation, simpler in its collection and one which 
will tend to inflate the cost of living and take from the con- 
sumer a sum far in excess of what the government receives in 
taxes. 

Can such a way be found? Certainly; as soon as we corn- 
menace to tax what people spend instead of what they save, we 
are on the right road. The physical activities of the world 
are reflected in buying and selling, which always goes on. Tax 
the turnover by taxing sales, and you are taxing something 
more substantial than profits or income. You are at the same 
time lifting the burden which is stifling competition and prog- 
ress, and the wasteful flow of capital into tax exempt secur- 
ities will be stopped and diverted into productive enterprises. 
If any object that under such a method a certain character 



TAXATION 105 

of income should still be taxed as such, then let surtaxes rest 
against that portion of income which is unearned, as interest, 
and free the part which comes from work or service. 

Under a consumption tax, the man of humble circumstances pays little 
as he buys little, and every citizen should contribute something toward 
the support of his government, while as the scale of living rises the tax 
burden becomes greater as more money is spent for things represented 
by sales which are taxed. There is a rough, elemental justice in that. 
The proper way to reach evils in corporate management or bad practices 
is under our present laws or laws directed against those specific things 
and not through attempted punitive taxation, which falls alike on the 
just and the unjust. 

The success of a sales tax in operation depends largely on 
whether levied in a simple or complex form. 

Among the considered forms are : 

A tax of a varying percentage, according to stages of manu- 
facture. 

A method needlessly complicated in attempting to make adjustments 
where none are necessary. 

A tax of a higher percentage against the sales of some one 
class of traders, as all manufacturers or all retailers. 

Such a tax lends itself more readily to being added to or loaded 
into prices because of the operation of percentage figuring of profits. 

A tax levied against the sale of certain articles or articles 

over a certain price. 

Open to the objections and annoyances of the present so-called luxury 
taxes, and a poor producer of revenue. 

A tax to be collected by the vendor from the purchaser. 

Involving the merchant in a vast amount of labor and accounting and 
annoying to the consumer. 

A stamp tax against sales. 

Easy and economical of collection by the government but open to 
the same objections as any tax collected by the vendor. 

A tax upon sales of real estate. 

Open to the objection that such a tax may be a confiscation of capital 
in a certain class of transactions, as a man has a small farm which cost 
him $10,000 and which he is forced to sell for $9,000. To tax the sale 
would mean a further depreciation of the owner's already impaired 
capital. 

A tax of a small percentage, as 1 per cent, on all sales of 
commodities from producer to consumer levied against gross 
sales as recorded on the dealer's books. 

I favor the latter method and would outline a form for the 
levy roughly as follows: 

1. That there be and is hereby levied upon each and every 
business involving the sale of any commodities or merchandise 
manufactured, produced or purchased by the vendor for sale, a 
tax equal to 1 per cent of the gross sales of such business. A 



106 SELECTED ARTICLES 

return of such tax shall be made and the tax paid monthly on 
the fifth day of each calendar month on the gross sales of the 
preceding calendar month, or, if in any such calendar month 
such gross sales shall be less than $1,000 the return shall be 
made and the tax paid on the fifth day of the first month 
succeeding the month or months the gross sales of which shall 
equal or exceed $1,000 on the gross sales of such month or 
months. 

2. The term business shall not apply to any isolated trans- 
action less than $1,000 nor to the occupation of street vending 
or peddling unless the gross sales therefrom shall exceed $100 
per month. 

3. The term gross sales means the aggregate prices on sales 
made during the period, less prices of any prior sales cancelled 
or of goods returned during such period. 

This should have the usual penal clause for failure to make 
a return and should be accompanied by a repeal of the excess 
profits tax on corporations, so much of the individual income 
surtaxes as apply to earned income and a readjustment of the 
rate of the normal tax as applied to corporations and the rate 
or exemption of the normal tax as applied to individuals. 

As to its productivity, a tax of 1 per cent on the turnover 
of commodities should produce over $2,000,000,000. This figure 
agrees with calculation made by the Actuary of the Treasury. 

This amount should offset the excess profits tax, which would scarcely- 
cross $1,000,000,000, and the surtaxes on earned incomes. The adoption 
of the principle is the essential thing. If some reduction in the surtaxes 
applied to unearned incomes is to be effected, the rate of sales tax can he 
increased fractionally beyond 1 per cent or by a moderate increase in 
the normal tax. 

The difficulty involved in defining what constitutes earned 
and unearned income can be met in several ways. One way is 
to define in the tax bill certain classes of income as taxable 
without the use of the words "earned" or "unearned." Another 
way is to make the unearned income define itself by applying 
the measure of 6 per cent to the capital of the taxpayer to 
indicate the proportion of unearned income, applying the surtax 
in the manner suggested in the margin note. 

Retain the present surtaxes or adopt new surtaxes and provide that 
the taxpayer may at his option by declaring the amount of his capital and 
his income, including the portion which is at present tax exempt be re- 
lieved of any surtax liability beyond the amount represented by 6 per 
cent on the surtax rate of his entire income applied to his capital. Illus- 
tration: Given a capital of $500,000 and an income of $100,000, take first 
the surtax on $100,000, which is $23,510, or equal to 23% per cent on 
the income, and 6 per cent of that gives 1.41 per cent, which applied to 



TAXATION 107 

the capital of $500,000 amounts to $7,050 as the total surtax. Prove the 
result by taking 6 per cent of $500,000, which is $30,000, and you will 
find that $7,050 represents just 23% per cent of that amount, so that the 
portion of the $100,000 income which is not earned by effort, or $30,000, 
bears the full present surtax of 23^ per cent, while the rest of the in- 
come, which represents effort, escapes with only the normal tax. 

The cumulative effect of a 1 per cent tax on sales all along 

the line from producer to consumer can hardly reach 3 per cent 

on the retail price. 

In its early stages, as raw material or partly manufactured, the tax 
represents but a small fraction of 1 per cent of the value of the finished 
article. 

For this same reason, the tax difference between two manufacturers, 
one who conducts several processes in his own plant and another who 
buys his raw material partly manufactured is apt to be not greater than 
% of 1 per cent of the value of the finished article, a difference sligh'. 
in comparison with already existing differences. 

Such a tax would lie against the sales of a vendor (easily 
determined) with no compulsion upon the vendor to collect 
from someone else. The government's interest lies in the 
collection of the tax. It has no concern in the fact that one 
taxpayer may absorb it while another passes it along or in any 
apparent inequalities between them arising out of the two 
methods. 

A sales tax of this character meets the objections raised 
against the present method: 

It bases a large portion of the government revenue on some- 
thing more tangible than profits and income. 

It will produce sufficient revenue. 

It is manifest that once a tax on sales is in operation and producing 
a given amount that as the needs of the government decrease the rate 
of the tax may be lowered; while should a sudden need arise for more 
revenue, as in the instance of a foreign war, a moderate increase in the 
rate of the tax would produce it. 

It will curb the tendency of capital to seek tax exempt 
securities. 

It permits the accumulation of savings for future industrial 
expansion. 

It will tend to restore competitive conditions and opportunity 
for initiative. 

By removing the prospective taxation of profits and restoring the ven- 
ture to the ordinary elements of risk. 

It will promote the utilization of natural resources. 

The timber may be cut without penalty, the invention put to work, etc 
It will encourage business thrift instead of waste, as high 
salaries and extravagances can no longer be charged off against 
taxes. 

It removes the tax advantage at present enjoyed by over- 
capitalized concerns. 



io8 SELECTED ARTICLES 

It is simple in its collection and auditing for both government 
and taxpayer. 

It is a very easy matter for any individual or business house to re- 
port sales. A very brief form should suffice, giving the gross sales for 
the month, or period defined, less returns and allowances. 

It rests fairly as between citizens. The one who consumes 
the most and spends the most pays the most in taxes. 

It should not increase the price of commodities beyond the 
amount of the tax itself, and it tends to be absorbed by the 
purveyor. 

It should work to reduce prices markedly. 

Several government authorities have admitted that the existing method 
of taxation has led to a loading of prices to the extent of 25 per cent, 
a large part of which does not reach the government. The substitution 
of a definite sales tax for an undetermined tax on profits should reduce 
the tax load to approximately 3 per cent, all of which goes to the gov- 
ernment, and so save the consumer a large sum. 

It brings the collection of a major part of the revenue, that 
from a tax on sales, up to date. 

Will in a comparatively short time end the load of back taxes hanging 
over the community. 

It is based on sound, democratic principles, and by reaching 
out into new sources of revenue spreads the tax load out equit- 
ably and in such manner as to be easiest borne by all. 

At present the unsuccessful merchant escapes taxation, while business 
ability is penalized. Under a sales tax, all pay on their sales, and there 
is a perfect commercial adjustment. 

It enables every taxpayer to know what his tax liability is. 

It is surer in its incidence, simpler in its application, more 
productive in its results and more economical in its collection, 
and has all the attributes of just taxation. 

It also by reducing the amount of revenue dependent upon income tax- 
ation removes many of the inequalities inseparable from such taxation. 

The principle of taxing incomes being a feature of British practice, 
may be adapted to British conditions, where the law of entail is in force 
and where many of the large incomes derive same from investments in 
quarters of the globe which would never contribute directly to the rev- 
enue of the British Government except through a tax levied against the 
income of the individual resident Briton, but there is a very grave doubt 
of the advisability of any such form of taxation in America where exist- 
ing fortunes are actively at work in the development of industries of 
common benefit. 

In commercial operations under a sales tax it will probably 

be found that prices of producers and wholesalers are considered 

to be or are quoted as plus tax and that the amount of the 

tax — that is, the 1 per cent, if such is the rate — will be added 

to the bottom of the invoice. The retail merchant, because his 

transactions are smaller and more individual, not desiring to 

collect a specific tax on each sale, and not being obliged to 



TAXATION 109 

make such collection (as he is in the instance of the present 
luxury tax) will probably find it most advantageous to treat the 
tax as an element of expense, adding same to the percentage 
figure which he uses as his cost. 

Retailers are accustomed to assembling items of expense, such as rent, 
wages, advertising, etc., and to represent same by a percentage figure 
which they add to the cost of an article to ascertain their cost beyond 
which to fix a selling price showing some margin of profit. Say a given 
.retailer's cost of doing business is 24 per cent he might change that figure 
to 2SY2 per cent, including the sales tax in his cost at a rate to cover 
the tax on his selling price, which is higher than the cost price to which 
the percentage has been applied. 

It is also possible that in certain lines of business or classes 
of commercial operations the sales tax, instead of being added 
at the bottom of an invoice, will be covered by a shortening of 
1 per cent in the discount terms. 

As an illustration: goods customarily sold on terms of 1 per cent 
off 30 days might be sold on terms of net 30 days, the seller absorbing 
the tax in return for the eliminated discount. 

Sales taxes so adjust themselves where in operation and a 
sales tax of a small percentage would readily so adjust itself 
and soon become a matter of course, as are at present a great 
variety of selling terms and discounts which are in operation 
in different lines of trade. 

A tax of a uniform percentage on sales of commodities, with 
no distinction between classes of commodities or stages of 
manufacture does not require any adjustment to varying degrees 
of profit in various lines of business between different dealers 
in the same line. 

Whether the profit is 5 per cent or 10 per cent or any other per- 
centage, the tax is not upon the profit but upon the sales and may in 
either event be passed along and will undoubtedly so tend to pass along 
in industries where the margin of profit is narrow, while tending more or 
less to be absorbed in industries where the margin of profit is broad. 

I would, therefore, respectfully recommend as a means 
toward reform in Federal taxation that the excess profits tax 
on corporations be abandoned and that individual income sur- 
taxes as applied to earned income be removed, that the normal 
income tax upon corporations and individuals be revised either 
as to rate or exemption, that the surtaxes upon unearned income 
be applied only after a somewhat increased exemption beyond 
the present $5,000, and that the bulk of the government reve- 
nue be obtained from five sources: (a) income from customs, 
which is now growing with the increase in importations; (b) 
certain excise taxes of established revenue producing power; 
(c) a tax on sales of commodities of a percentage probably 1 



no SELECTED ARTICLES 

per cent; (d) a normal tax on all incomes of whatever char- 
acter above the exemption; (e) surtaxes upon unearned incomes. 
I would also respectfully recommend that in connection with 
existing inheritance taxes the tax be levied against the bene- 
ficiary, or inheritor, based on the amount which he receives, but 
collectible out of the estate as a whole before distribution, in 
place of the present method of levying the tax against the 
estate. 

Five hundred thousand dollar estate left to a widow and one child 
bears the heavy surtaxes applicable to an estate of that size, but the 
hardship is not great, as there are only two heirs, each receiving in an 
equal distribution a large amount. Where an estate of the same amount, 
$500,000, is left by a man of large family, however, and divided among 
a wife and perhaps six or seven children and one or two other depend- 
ents, the average amount received by each being about $50,000, the appli- 
cation of the surtax on the _ $500,000 estate to each one of these small 
inheritances is a grave injustice. 

To base the tax on the amount inherited will restore equity and at 
the same time accomplish the useful social purpose of tending to break 
up and cause the division of very large estates. 



REPORT OF COMMITTEE ON TAXATION 
NATIONAL ASSOCIATION OF MANUFAC- 
TURERS 1 

War increased the expenses of government tremendously. 
To meet these expenses, we not only derived more revenue 
from usual sources, but new revenue resources were discovered, 
most notable of which were excess profits, a totally new form 
of revenue. 

The 18th Amendment deprives the government of an annual 
revenue of some $500,000,000. This demands that we review and 
revise our schedules to make up this permanent deficit, and 
provide an adequate certain revenue for the future. 

The purpose of taxation should be to provide revenue. Obvi- 
ously those forms which produce revenue for the maintenance 
and operation of government should be adequate. In this view 
lies the real danger, since it tempts us to make certain emergency 
taxes the basis of a permanent system. 

Temporary results are notably untrustworthy. Too often they 
mislead into a belief that a system immediately successful will 
remain continuously and permanently so. We continue it and 

1 Proceedings of the Twenty-Fifth Annual Convention of the National 
Association of Manufacturers of the United States of America. May 17-19, 

IQ20. p. 14-22. 



TAXATION in 

only after irreparable injury has been done is it repealed. We 
must remain alert to the by-products of the systems we are 
interested in. We must search, uncover, and accurately determine 
the growing tendencies and certain defects obtaining in that sys- 
tem, however successful it may seem. If our investigation into 
a revenue system shows that the flood of revenue from a particu- 
lar source endangers that source; if the flood loses substance in 
its tortuous course and merely trickles into the Federal Treasury, 
and if we find it affecting seriously the very people whom it was 
designed to serve, we would be loth to continue it. 

Thus stands the record of the excess profits tax. 

This tax was adopted as a temporary measure to meet the 
emergencies brought about by the war, predicated upon foreign 
experience. It was serviceable as sixth. We are now endeavor- 
ing to get back on a substantial before-the-war basis; we must 
get rid of all expediencies which tend to interfere with our future 
industrial and equipment development. 

Congress should devise a more satisfactory program of 
taxation, achieve an economically safe, sound, productive system 
of revenue — a system such as will help the government without 
hampering industry and thereby help the public. As such, the 
excess profit tax will not serve. The new tax must be one 
which will provide certain adequate revenue and yet insure indus- 
trial and public prosperity. 

Those who advocate the repeal of the excess profits tax 
are impelled by unselfish motives. They are, for the most part, 
men who have placed national welfare above selfish partisan 
interests. After a practical experience with this tax and its 
effect upon capital, upon labor, upon production, upon price and 
the enormous expense in preparing tax returns and collecting 
such a tax, they are asking for a speedy appeal of this measure. 

To mention some of the objections, we find the following 
significant indictments : 

The excess profits tax: 

i. Deprives industry of the fruits of its foresight and 
sagacity. 

2. It burdens brains, ability and energy. 

3. It discourages production. 

4. It penalizes enterprise and ingenuity. 

5. It interferes with the accumulation of industrial capital 
for the development of business. 



ii2 SELECTED ARTICLES 

6. It encourages wasteful expenditures. 

7. It puts a premium on over-capitalization and a penalty 
upon conservative business practice. 

8. It discourages new ventures and confirms old ventures 
in their monopolies. 

This last is particularly significant. Since all industries grow 
from small beginnings, they need encouragement and resources 
in the form of profits for future development. But the excess 
profits tax deprives industry of these encouragements and re- 
sources, repressing development and checking enterprise in its 
very beginning. 

Again, the profits of capital are the wages of efficient enter- 
prise. These profits are not pocketed, but are reinvested for 
further development and promotion of the enterprise which 
gives employment to labor. Therefore, it seems a mistaken 
policy to maintain a system of taxation which disturbs and 
obstructs general prosperity. 

There is another serious objection to the excess profits tax. 
It operates as a cost plus system and has the same effect. It 
induces waste and extravagance throughout industry. It dis- 
courages efficiency in both the ranks of capital and labor. 

As far back as 1776 Adam Smith arranged the fundamental 
principles of a just and useful tax. These maxims of taxations 
are: 1 (1) a tax ought to take out of the pockets of the people 
as little as possible over what it brings into the public treasury. 
It ought not be eaten up in salaries of a great number of officers. 
(2) It ought not obstruct industry which gives maintenance and 
employment to multitudes. (3) It ought to be fair and, there- 
fore, not offer temptation to evade. (4) It ought to be easy to 
compute and to collect. Furthermore, in a popular government, 
any system of taxation proposed with a view of convincing the 
public at large that the tax burden imposed is paid by a limited 
few tends to demoralizing and extravagant expenditure on the 
part of government, the burden of which ultimately must fall 
upon all if the country is to be prosperous and business enter- 
prise thrive. 

The excess profits tax violates these fundamental principles 
of a just and useful tax. The cost of collecting the present tax 
is about $40,000,000. It is so intricate that few understand it. 
It represses industry ; and a variety of schemes have been created 

* For a fair and exact statement of Adam Smith's maxims, see Part I. 



TAXATION 113 

to evade it. It bears none of the qualities of a just and useful 
tax. 

The economic welfare of the country demands an immediate 
repeal of the excess profits tax. But its repeal demands also 
that a satisfactory substitute be found. This substitute tax must 
have certain specific advantages of a just and useful tax to recom- 
mend it at this time. It must produce adequate revenue, must 
be easily administered, must be inexpensive, must impose no un- 
necessary burdens anywhere, it must discourage waste and 
extravagance, it must promote prosperity. 

At the time of the Civil War our government was confronted 
by a revenue problem similar to the present. It resorted to a 
tax on sales which was called an excise tax, imposed upon a 
limited number of commodities. 

It operated as a tax on sales and was very simple in operation. 

In addition to this excise tax there was a special retailer's 
tax and wholesaler's license tax of $10 and an income tax of 
5 per cent. These three taxes were paid annually. 

On account of its limited application and the increased revenue 
derived from customs, this tax was repealed except in the case 
of liquors and tobacco, articles of luxury. 

We feel that possibly the solution of the present problem 
lies in a carefully devised gross sales tax. Such a tax would 
admit of many variations. But it seems the most reasonable 
form would be a limited tax on turnovers of wares, goods and 
merchandise. 

Such a slight tax on articles of wide consumption would have 
small effect on the resources of the consumer. 

A tax of 1 per cent on every sale of beef, from the hoof to 
the consumer, would produce an annual revenue of $60,000,000. 
Yet it would amount to little more than l / 2 c. per pound on the 
purchase price to the consumer and consequently would likely 
be borne by the retailer. This same principle would apply in 
the same way to many other articles of wide consumption. Still 
it would produce sufficient revenue to obviate the excess profits 
tax, yet entail no hardship upon the consumer. 

It seems impossible to secure at this time any reliable figures 
of gross sales, but the estimated gross sales for the year 1919 
was approximately $672,000,000,000 after the elimination of re- 
turns, allowances and intercompany sales. A 1 per cent sales 
tax on this amount would produce an annual revenue of 



ii4 SELECTED ARTICLES 

$6,720,000,000 which exceeds the amount called for in the national 
budget. More conservative estimators figure the gross sales as 
$200,000,000,000, and even on this basis a 1 per cent tax would 
yield a yearly tax of $2,000,000,000. 

We would, therefore, suggest that a gross sales tax on all 
sales of wares, goods and merchandise by individuals, partner- 
ships and corporations and some forms of public service be 
accorded serious consideration. 

The individual, partnership or corporation should secure a 
license from the government to entitle him to do business, some- 
what along the lines of the license now granted to tobacco 
dealers, for which a nominal charge should be made. This is 
to place on record those engaged in business and as a check to 
force tax returns. 

The tax on sales would be a tax on the sales as recorded on 
the books of any individual, partnership or corporation, large or 
small, and the exhibits hereto appended show how this would 
be added as a direct percentage in billing and estimating as an 
item of expense in fixing prices. 

A simple form could be prepared showing the net sales, elimi- 
nating returns, allowances and intercompany sales, this state- 
ment to be executed by a notary public or other authorized 
official and sent to the revenue office with a check covering 1 per 
cent of the sales. This would cause a steady flow of revenue 
and overcome the necessity of the government borrowing money 
except in rare emergencies. 

In view of the revenue that could apparently be derived from 
a gross sales tax, we respectfully suggest that the present forms 
of federal taxation be changed or revised and that the following 
plan be given careful consideration in amending the system to 
deal more efficiently with the problems at hand: 

1. A straight tax of 1 per cent upon all sales of goods, wares 
and merchandise by individuals, partnerships, corporations and 
some forms of public service corporations. 

2. A normal tax of 4 per cent on all incomes of whatever 
character over $2,500 for single persons and $5,000 for married. 

3. Income from customs. 

4. Certain excise taxes of established revenue-producing 
power. 

We believe this gross sales tax would be a just, certain and 
adequate source of revenue. 



TAXATION 115 

1. It will be fairly distributed over a great mass and through 
the year so as to be scarcely noticeable. 

2. It will reach many who should pay taxes but who now 
escape them. 

3. It would be definite and easily ascertainable. 

4. It could be collected monthly or quarterly. 

5. Excess profits tax is unproductive during a depression; 
while the gross sales tax is certain at all times. 

6. Competition will automatically safeguard the consumer 
against tax profiteering. 

7. It would not be discriminatory ; it would be fair to all 
businesses. 

8. It will tempt free capital now driven into non-taxable 
securities to liberal investment in productive industry. 

This tax would give to business the stimulus it now needs and 
would help put economic America on a substantial basis and go 
far toward promoting permanent prosperity. 



AN INCOME TAX LESSON 1 

More or less startling newspaper headlines have recently 
announced the fact that sixty-five individuals reporting taxable 
income for the calendar year 1919 filed returns showing income 
of $1,000,000 or more. This fact, stated by itself, may loom 
large in the popular estimation. It seems to convey an idea of 
vast wealth in the hands of a few. The headlines failed to 
point out that for the calendar year 1916 the income tax returns 
disclosed income of $1,000,000 or more for two hundred six 
individuals. In other words between 1916 and 1919 there was 
an elimination of one hundred forty-one taxable incomes of 
$1,000,000 or more. 

In 1916 the records show that three hundred seventy-six 
persons reported income of between $500,000 and $1,000,000, while 
in 1919, the reports included only one hundred eighty-nine. The 
decline in the number of large incomes continues down to the 
record of income from $150,000 to $200,000, of which there were 
1,284 returned for 1916 and 1,092 for 1919. Incomes less than 
$150,000 showed uniform increases from 1916 to 1919. 

Does this mean that the very rich are getting poorer and the 
comparatively poor are getting richer? Not necessarily by any 

1 Wall Street Journal. July 27, 1921. 



n6 SELECTED ARTICLES 

sane accounting. It chiefly means that the incidence of high 
surtax rates since 1916, in the effort to tax the very rich dispro- 
portionately, has driven reinvestment of income of the very rich 
out of business channels into tax-exempt securities. It means 
that the extremely rich prefer to invest in 4 per cent or 5 per 
cent tax-exempt municipal and state securities rather than invite 
the trouble and risk of embarking in business enterprises that 
must yield 17 per cent or more in order to be equivalent to a 
4 per cent tax-exempt investment. 

In 1916, the income reported in excess of $150,000 was 
$1,498,832,392, comprised in 3,833 returns. In 1919, the reported 
income in excess of $150,000 had shrunk to $811,160,125, com- 
prised in 2,543 returns — a decline of $687,672,267 in income and 
of 1,290 returns. 

This shrinkage was not due to hard times, for 1919 was 
notoriously a better year than 1916. One indication of this is 
that net returns by individuals with $3,000 to $150,000 income 
showed $12,411,931,807 in 1919 as against $4,799,745,228 in 1919, 
an increase of $7,612,186,579. The returns of $3,000 to $150,000 
incomes in 1919 numbered 1,835,604 while the number in 1916 
was only 433,203- 

In the face of this general display of increased prosperity it 
is absurd to assume that the very rich did not share with the 
rest of the community in an enlargement of income. Neither 
is it conceivable that returns were falsified by the wholesale 
as soon as income passed the $150,000 mark. The simple answer 
is that the high surtax rates defeated their own purpose. Instead 
of taking toll from the very rich, as they were designed to do, 
they drove wealthy investors out of the business field into non- 
taxable investments. 

The moral is equally obvious. Surtax rates must be reduced 
to a point where they will not kill the geese that should lay 
golden eggs for the support of government, and an end should 
promptly be put to the constant enlargement of the tax-exempt 
pasture. 



BRIEF EXCERPTS 

For one hundred fifty years this country subsisted on con- 
sumption taxes. They were the only kinds that we paid. I refer 



TAXATION 117 

to the taxes collected through the Custom House, and through 
the Internal Revenue bureaus. Jules S. Bache. The Turnover 
Tax— The Only Way Out. p. p. 

The advantages of this tax would be that it would be equally 
paid by everybody in the country, and might lead, perhaps, to 
thrift, since those who wish to avoid paying taxes would only 
have to decrease their expenditures. Jules S. Bache. Bache 
Review. Special Edition. April, 1920. 

There aren't any two general sales taxes throughout the 
world which are the same. In the Philippines all farming 
products are exempted; in Canada, necessities of life are 
exempted; in France numerous other things are exempted; and 
so on. Edwin R. A. Seligman. Proceedings of the Second 
National Industrial Tax Conference, p. 77. 

A sales tax, a turnover tax, is a consumption tax. As such, 
it has got to be passed on to the consumer. If it can not be 
passed on, it can not be levied. I can see no possible injustice 
to any company by their not being able to pass the tax on under 
these conditions, if those conditions are provided for. A sales 
tax is an overhead charge like rent, labor, clerk hire, and kindred 
expenses. Jules S. Bache. Hearings before the Committee of 
Ways and Means. 192 1. p. 84. 

The excess profits tax is a consumption tax pure and simple, 
and no possible device can make it anything else. Practically 
all taxes are consumption taxes. I don't know that Mr. Rocke- 
feller is able to pass on his 73 per cent, but I know that most 
business men in this country are busy passing on their taxes, 
and if they didn't succeed in doing it, many of them would be 
bankrupt today. Jules S. Bache. Proceedings of the Second 
National Industrial Tax Conference, p. 57. 

A sales tax would undoubtedly be highly productive of 
revenue ; it would, I believe, diminish the "loading" of prices ; 
it would be free from the injurious effects of other taxes on 
the natural flow of capital ; it ought to be relatively simple of 
collection ; it would not require the employment of lawyers and 
accountants by the taxpayer and the irritating and worrying 
work of grappling with intricate schedules; it could be paid as 



n8 SELECTED ARTICLES 

it accrues, say at the end of every month, instead of being 
ascertainable only at the end of the year and payable thereafter. 
Otto H. Kahn. Addendum to Some Suggestions on Tax Re- 
vision and the Sales Tax. p. 26-7. 

Even if the theorist who believes in levying the bulk of 
taxation on the man who can most easily pay — viz : the man 
with the largest income — is correct in his belief, his purpose 
is defeated by the fact that the man with the large income 
seeks the protection of the tax-exempt security, and leaves that 
man to bear the greatest burden who, even with heavy income 
taxes, is not willing to become a drone, but keeping his money 
in commerce for his own advancement and the up-building of 
the country, does not seek that protection. Therefore, in this 
country, I am unalterably opposed to the income tax in any 
shape whatever. Jules S. Bache. Address before Retail Mer- 
chants of Detroit. 

The sales tax is not a novel tax. The Romans had it, not 
to speak of the Egyptians and the Babylonians. The sales 
tax has existed in one form or another for a great many years, 
with only two exceptions, it has been abolished everywhere and 
has not been re-introduced in any first class country — and those 
two exceptions are Germany, which re-introduced it in 1919, and 
France, which introduced it in 1920. We can learn little one 
way or another, either for or against it, from Mexico or Cuba 
or the Philippines or Canada, all of which are countries of 
insignificant economic proportions, where we do not find the 
real kind of sales tax that we have been discussing today. 
Edwin R. A. Seligman. Proceedings of the Second National 
Industrial Tax Conference, p. 72. 

Our suxtaxes go to 65 per cent. There is in addition 8 per 
cent normal tax, making a total maximum tax of 73 per cent. 
It is an extreme rate which I think may fairly be said to be 
impossible, impracticable in times of peace. 

For the year 1916, when the tax rate was low, there was 
reported by taxpayers having a net income of $300,000 over 
$992,000,000 of net income. That is, in 1916, the year when our 
tax rates were relatively low. By 1918 — that is to say, in two 



TAXATION 119 

years, and good years — the amount of net income reported by 
taxpayers having incomes of $300,000 or over had fallen to 
$392,000,000. It seems to me the common sense of the situation 
indicates that we can not successfully enforce tax rates running 
to 73 per cent. Thomas S. Adams. Hearings before the Com- 
mittee on Ways and Means. 1921. p. 10-11. 

That the results in question are assured is proven by the 
experience in the Philippines, where the [sales] tax has been in 
operation since 1905, and where under no circumstances would 
its repeal be contemplated for a moment, and where an increase 
in the rate of from 1 per cent, at which it is now being levied, 
to 2 per cent is being discussed with popular approval, in 
order practically to abandon all other types of taxation. 
In its initiation in the Philippines the very same objections 
were raised against it, as are being made here now. Mass 
meetings were held and parades were formed in antagonism 
to the innovation. Three months after the tax had been put 
into operation and was working, not a murmur was heard 
against it, and today a revolution would occur if any attempt 
were made to repeal it. Jules S. Bache. The Turnover Tax — 
The Only Way Out. p. 6. 

The tax on retail sales paid by the consumer is the most 
disturbing, irritating and altogether unpopular method of col- 
lecting taxes perhaps ever invented. It is the mustard gas of 
taxation. 

It is illustrated in the soda water tax, where, for every 15c. 
drink, the public has to get a little pink ticket and pay 2c. more 
for it — a most outrageous tax; over 13 per cent — but the annoy- 
ance and inconvenience is almost worse. 

This does not describe the tax on gross sales, or turnover. 
In this turnover tax, the seller, not the buyer, pays. This is the 
way it would work: 

The merchant or seller would take from his books once a 
month the total amount of his sales and forward the statement 
to the collector with his check for 1 per cent of such sales. 
This would be the method all along the line. William C. Corn- 
well, An Intolerable Situation, p. 11-12. 



120 SELECTED ARTICLES 

Congressman William R. Green. You think that business 
men know all about the science of taxation. 

Mr. Jules S. Bache. I do not think anybody else does. I 
do not think there is a science of taxation. 

Mr. Green. You do not think there is? 

Mr. Bache. No, sir. 

Mr. Green. I had come to the conclusion, since you were 
talking, that that was your opinion. 

Mr. Bache. I dispute the words "science of taxation." 
There is slavery of taxation. Taxation is a burden which we 
must all bear. 

Congressman Henry T. Rainey. Taxation has been defined 
to be a method of getting the most feathers with the least 
squawking of the goose. 

Mr. Bache. I agree to that. The sales tax will do that. 
There is no tax in the world that will ever get so much money. 
Hearings before the Committee on Ways and Means. IQ2I. 
p. 87. 

I have analyzed the fiscal situation in a concrete way, and if 
you will permit me to I would just like to make these three 
observations regarding it: 

First. That the $24,000,000,000, the real aftermath of the war, 
represented by various interest-bearing securities, really mean a 
mortgage on each family in America of $1,200 if we divide the 
total debt among the twenty million families constituting the 
Nation's population. 

Second. That the annual carrying charge on that mortgage 
means $50 per family, or $10, on the average, annually, on every 
man, woman, and child in the country. 

Third. If we are to operate on a $4,000,000,000 appropriation 
or budget for four years, as was suggested by Secretary Houston, 
that means that every man, woman, and child in this country, 
on the average, during each of these four years must somehow 
or other provide $40; or, in other words, each American family — 
a family consisting of five members in accordance with the 
familiar census type — would somehow or other have to manage 
to provide $200 per year to meet the fiscal requirements of the 
country. /. /. Klein. Hearings before the Committee on Ways 
and Means. 1921. p. 69-70. 



TAXATION 



121 



Federal revenue from all forms of internal taxation in the 
fiscal year 1921, which ended July I, decreased $812,579,486, 
compared with the government's internal taxation receipts the 
year before. This was disclosed today by a preliminary report 
from D. H. Blair, commissioner of internal revenue, to the 
secretary of the treasury. 

Commissioner Blair's report shows that collections from in- 
come and excess taxes, which constitute almost three-fourths of 
the internal taxation yield, decreased more than $700,000,000. 

A recapitulation of the internal revenue receipts from all 
tax sources for the fiscal year 1921 follows: 
Tax Sources 1920 

Income and profits $3,956,934,499 

Estates 103,635,563 

Transportation and insurance 307,769,841 

Beverages 197,332,105 

Tobacco 294,777,05 1 

Admissions and dues 81,918,556 

Excises 267,882,602 

Capital stocks, etc 105,479,925 

Stamp taxes 84,347,827 

Child labor employment 2,380 

Miscellaneous, including national prohibition. 7,499,898 



1921 

$3,225,790,653 

154,039.902 

320,504,167 

141,295,508 

253,990,016 

95,882,345 

229,331,657 

92,446,376 

72,468,013 

24,223 

9,237,900 



Total $5,407,580,251 $4,595,000,765 

Cleveland Plain Dealer. August 29, 1921. 

The collection of internal revenue taxes for the fiscal year 
1920 and selected prior years are summarized in the following 
table : 



Sources 


1920 


1919 ( 1918 


1914 


Distilled spirits 

Fermented liquors. . . 


$97,905,275.71 

41,965.874 09 

295,809,355.44 

3,728,276.05 

102,933,701.35 
883,863,871.82 

24,437,893.75 

3,956.936,003.60 
5,407,580,251.81 


$365,211,252.26 

117,839,602.21 

206,003,091.84 

2,791,831.08 

33,497,047.82 
513.823,884.14 

10,199,466.51 

2,600,783.902.70 
3,850,150,078.56 


$317,553,687.33 

126,285.857.65 

156.188,659.90 

2.336,907.00 

27,281,269.12 
225,973,363.44 

4,336,182.21 

2,838,999.894.28 
3,698,955.820.93 


$159,098,177.31 

67,081,512.45 

79,986.639.68 

1,325,219.13 


Oleomargarine 

Capital-stock tax, in- 
cluding other spe- 


Miscellaneous and 
war excise taxed. . 

Stamp sales for par- 
cel-post packages. 


1,136,070.65 


Income and excess - 

profits taxes 

Total receipts 


71,381,274.74 
380,008,893.96 



Annual Report of the United States Conimissioner of Internal 
Revenue. 1920. p. 8. 



I had occasion to look over the report of the Commissioner 
of Internal Revenue, I think, for 1917, and when the incomes 



122 



SELECTED ARTICLES 



reached $4,000,000 or $5,000,000, then there is no change, there 
is no difference, between the surtax on $5,000,000 and that of 
$6,000,000, $7,000,000, $8,000,000, or $10,000,000, or any sum above 
$5,000,000. Then I turned to the page where it was given in 
States the number of people who paid taxes on income of more 
than $1,000,000. I found there was not a man in the State of 
Michigan who paid taxes on incomes of more than $4,000,000, 
although we know there are several men in the State of Michigan 
whose income is figured above $4,000,000 a year. It is evident 
they are either investing their money in tax-free securities or 
adding to the plants and failing to distribute the profits. That 
would happen. I know of one in particular, whose income is 
very great, who has added many million dollars' worth of 
additions to his plant, invested several million dollars, and, of 
course, employing a large number of men. He must not be 
criticized for that; for that he should be complimented, but 
with an income of $30,000,000 to $50,000,000 a year he did not 
pay taxes on an income of more than $4,000,000. It is evident he 
has been investing in tax-free securities, in my opinion. Joseph 
W. Fordney. Hearings before the Committee on Ways and 
Means. 1921. p. 15. 



Table Showing Total Number of Personal Income-Tax Returns Filed 
for the Calendar Year Ended December 31, 1918, Distributed 
by Income Classes 
Income Classes Number of Returns 



$1,000 to 

2,000 

3,000 

4,000 

5»ooo 

6,000 

7,000 

8,000 

9,000 
10,000 
11,000 
12,000 
13,000 
14,000 
15,000 
20,000 
25,000 
30,000 
40,000 
50,000 
60,000 
70,000 
80,000 
90,000 
100,000 
150,000 



$2,000 1,516,938 

3,000 1,496,878 

4,000 610,095 

5,000 322,241 

6,000 126,554 

7,000 79,152 

8,000 51,381 

35,n7 

27,152 

20,414 

16,371 

13,202 

10,882 

9,123 

30,227 

16,350 

10,206 

11,887 

6,449 

3,720 

2,441 

1,691 

1,210 

934 

2,358 

866 



9,000. 

10,000. 

11,000. 

12,000. 

13,000. 

14,000. 

15,000. 

20,000. 

25,000. 

30,000. 

40,000. 

50,000. 

60,000. 

70,000. 

80,000. 

90,000. 
100,000. 
150,000. 
200,000. 



TAXATION 



123 



Income Classes Number of Returns 

$200,000 " 250,000 401 

250,000 " 300,000 247 

300,000 " 400,000 260 

400,000 " 500,000 122 

500,000" 750,000 132 

750,000 " 1,000,000 46 

1,000,000" 1,500,000 33 

1,500,000 " 2,000,000 16 

2,000,000 " 3,000,000 11 

3,000,000 " 4,000,000 4 

4,000,000 " 5,000,000 2 

5,000,000 and over 1 

Total 4,425,114 

Statistics of Income. Compiled by United States Commissioner 
of Internal Revenue. 1921. 



NEGATIVE DISCUSSION 

SALES OR TURNOVER TAX » 

It is not advisable under present conditions to resort to any 
one of the several forms of a sales or turnover tax of general 
application which are being proposed. 

The Committee approached in the most hopeful spirit the 
proposal that our tax system could be greatly simplified and 
perhaps the greater part of the necessary revenue couldbe 
raised through the adoption of some form of a generaF^ales 
tax. It is no exaggeration to say that most of the members 
of the Committee at the outset were rather predisposed in 
favor of a general sales tax, and it was with the greatest reluc- 
tance that the Committee reached the conclusion that such a 
tax does not offer a satisfactory solution of the taxation problem. 
Forms of Sales Tax Now Being Proposed 

The several proposals for a sales tax of general application 
fall into three groups: 

i. A tax on every sale or turnover, not only of commodities 
but also of services, real property, capital assets, etc., and on 
rent and interest. 

2. A tax on every sale or turnover of goods, wares and 
merchandise (i.e., limited to commodities). 

3. A tax on all final sales of goods, wares and merchandise 
for consumption or use. 

The first two are of much the same nature, differing only 
in the scope of their application, and can well be considered 
together, after which the third will be taken up. In discussing 
this entire question it is to be borne in mind that the comparison 
is not with the existing objectionable excess profits tax, the 
repeal of which the Committee joins in recommending, but 
rather with an increase in the corporation income tax, the docu- 
mentary stamp taxes, customs duties and the sales taxes on 
specified commodities. 

1 Report of the Tax Committee of the National Industrial Conference 
Board on the federal tax problem, p. 12-31. 



126 SELECTED ARTICLES 

Reasons for Not Approving Turnover Tax 

The more important of the reasons which have led the Com- 
mittee to its conclusion after hearing and giving the most care- 
ful consideration to extended arguments on both sides are: 

I. There is great uncertainty as to the form such a tax 
would finally take, as well as to the rate necessary to raise the 
required revenue. 

Various advocates of a general turnover tax estimate that a 
i per cent tax on all turnovers would produce from $1,500,000,000 
to $5,000,000,000. If the tax is limited to 1 per cent on the 
turnover of goods, wares and merchandise alone, the estimates 
go down to as low as $750,000,000. One of the best known 
advocates of the sales tax states that no one can estimate 
within $1,000,000,000 what such a tax would produce. Mr. 
Joseph S. McCoy, in a letter to the Committee dated September 
6, 1920, estimates that from a tax of 1 per cent covering sales 
of all kinds by traders, manufacturers, mines and farms, 
$1,100,000,000 should, with careful administration, be collected. 
If to this is added sales of real estate, sales of the use of real 
estate (rents), amusements, sales by hotels, including prepared 
food, lodging and service, advertisements, securities, etc., he 
estimates that this would be increased to about $1,575,000,000. 
It is important to note, moreover, that he says his estimates 
are based upon every available source of information, which is, 
however, very meagre. The Committee does not feel it advis- 
able to levy a tax the revenue from which no one can reasonably 
forecast and which its very proponents admit might produce 
$1,000,000,000 more than was anticipated. This tax must be 
paid in the first place by business, whether it is eventually passed 
on or not. It is not believed that business men desire to pay or 
even collect for the Government perhaps twice as much revenue 
as may be required. 

Experience in such other countries as have introduced some 
form of general turnover tax, such as the Philippines and 
Canada, indicates that Congress would find it necessary to yield, 
as they have, to pressure and make important exemptions, such, 
for instance, as the initial sale of farm products. If this were 
done the yield of the tax would be greatly reduced, and it is 
not improbable that the basic rate would be set at 2 per cent or 
higher, and that still higher rates would be applied to the sales 
of less-essentials and luxuries. The Canadian act, for example, 



TAXATION 127 

in addition to the basic rate, levies additional higher rates on 

specific articles such as : 

3% on chewing gum. 
S°/n on pianos. 

10% on articles of clothing, carpets, rugs, robes or sporting goods over 
a fixed value, boats, yachts, cameras, confectionery, fire arms, cart- 
ridges, pianos over $450, other musical instruments, lighting fixtures, 
certain articles of cutlery and toilet articles, cut glassware, clocks 
and watches, walking sticks, etc. 

15% on automobiles retailing for not more than $3000, oriental rugs and 
antiques, certain articles of furniture and chinaware. 

20% on automobiles retailing for more than $3000, jewelry over $5 in 
value, certain toiletware, liveries, hunting garments and knives, 
smoking articles, certain patent medicines, perfumes, etc. 

50% on certain articles of gold. 

Taxes at specific rates on other articles. 

An annual license tax for selling or dealing in any of these articles. 

It is not improbable that if Congress should undertake to 
frame a law taxing the sale of every article, it would be inclined 
to impose higher rates on less essential articles similar to those 
in the Canadian law, nor would Congress be likely to reduce 
luxury taxes while it was imposing a tax on the sale of neces- 
sities. 

It has been suggested that bankers, brokers and commission 
men should be taxed, not on their sales, but on their commis- 
sions or gross profits ; and such an exception might be neces- 
sary. If this were done, it is reasonable to expect that Con- 
gress would impose some other tax upon these classes of busi- 
ness and that if such a tax were imposed on them it would at 
least be as burdensome as the tax on other classes of business. 

One advantage which the sales tax possesses is that it would 
be comparatively easy for any business organization to deter- 
mine what it would have to pay. It is urged that because the 
amount of the tax is easily determinable it could be paid 
monthly or quarterly upon the sales of the preceding month 
or quarter on the pay-as-you-go principle, and the accumulation 
ot a tax obligation to be paid in the following year could thus 
be avoided. If such a tax law were passed, applying to the 
sales of 1921, business men would have these payments to 
make in addition to meeting the payments of the excess profits 
and income taxes levied upon the income of the year 1920, 
which must be paid during 192 1. 

2. A turnover tax would be a large tax, not a small tax. 

It is frequently stated by the advocates of the tax that I 
per cent on every sale is such a small amount that certain 
admitted inequities in its operation are negligible. The tax is 
advocated, however, to produce enought revenue to replace the 



128 SELECTED ARTICLES 

excess profits tax and materially reduce the surtaxes on personal 
income. The figure most commonly named is $2,000,000,000. 
As pointed out above, it is probable that to produce such a 
revenue the basic rate would have to be 2 per cent or higher. It 
must be borne in mind that the tax will be collected entirely 
from business and that this amount of revenue is more than 
double what would be secured from the excess profits tax. In 
spite, therefore, of the illustrations of individual cases based 
upon a 1 per cent rate, the tax as paid by the average business or- 
ganization would be a very large amount. A tax of only 1 
per cent of his gross sales levied upon a merchant who turns his 
stock four or five times a year would in many cases equal or 
exceed 40 per cent of his net profits. 

3. The uncertainty as to whether or not the tax would in 
fact be shifted to the consumer, and the advantage it would 
give to the multiple-process organizations would be most serious 
in their effect upon business. 

There is some disagreement among the advocates of the sales 
tax as to the extent to which it would be shifted. Some assert 
that unless the tax is shifted it has little in its favor, and that 
in cases where there is a reasonable doubt whether it v/ould be 
shifted, it should not be imposed. Others maintain that it will 
be shifted or not, according to competitive conditions, because 
such a tax would be a generally recognized item of cost. The 
first element of uncertainty as to the extent to which the tax 
would be shifted arises from the fact that certain competitors 
would pay it to a greater extent than others engaged in the 
same industry. 

Those advocates of the sales tax who admit it can not al- 
ways be shifted, assert that it will be shifted when competition 
permits and will not be shifted when competition does not 
permit, just as would be the case in any other item of cost. 
They compare this tax to the payment of rent, stating that 
every business man has to shift his rent through the selling 
price of his goods. In considering this argument we must 
bear in mind the change that has occurred in business con- 
ditions and not to be misled by the experience of the last few 
years, during which it was comparatively easy for most busi- 
nesses to shift any advancing item of cost with a profit added. 
The country has passed from a sellers' market to a buyers' 
market. Items of advancing cost can not be readily passed 



TAXATION 129 

on to the consumer. It is conceivable that even an advance 
in rent might come out of profits in special situations where 
it would be impossible to advance the selling price sufficiently 
to cover it. A merchant with a stock of goods on hand on 
which the prices were declining might find it difficult to advance 
his prices enough to cover the tax. Business men generally 
are confronted with the necessity of reducing their costs in 
order to be able to sell their product at prices which will 
encourage purchases by consumers. Such a tax would stand 
in the way of this purpose. It seems undesirable that the 
tax be shifted when competition permits, and not shifted when 
competition does not permit. When business is good and the 
demand is strong and, consequently, competition not keen, the 
tax could be shifted. That is the very time when a business 
is making a profit and can afford to pay a tax. When the 
demand falls off and competition grows so keen that the tax 
cannot be shifted, how can it be paid? Under such conditions 
there may not be any net profits from which to pay it. It 
would be added as an item of cost to the losses which might 
bring insolvency. 

4. To the extent that a sales tax is not shifted it becomes 
a tax on gross income, which is entirely inequitable as between 
various classes of business. 

The Committee believes that a tax upon gross income 
would be more burdensome than a tax upon net income. The 
inequity of a tax on turnover or gross income as between a 
business which turns its capital once in several years and 
another which turns its capital several times a year — provided 
the tax cannot be entirely shifted — is too great to be borne. 

The statistics of taxable income for 191 7, the latest year 
for which a report has been issued by the Bureau of Internal 
Revenue, indicate that in that year the total gross income of 
manufacturing corporations was $40,437,000,000, and the total 
taxable net income was $5,736,000,000. The total gross income 
of trading corporations was $19,804,000,000, and the total tax- 
able net income was $1,481,000,000. Assuming that the gross 
income did not greatly exceed the total sales, a tax of only 
1 per cent upon the gross would be equivalent to 7 per cent 
on the net in the case of manufacturing corporations, and 13.4 
per cent on the net in the case of trading corporations. It will 
be noted that these percentages are only an average and that 



130 SELECTED ARTICLES 

while in some individual cases they would be lower, in many 
other cases they would undoubtedly be higher. 

To illustrate the effect of the tax, manufacturing corpora- 
tion A, which employs in its business a capital of $1,000,000, 
makes a net profit of $100,000, and has an annual gross income 
of $500,000, might be compared with trading corporation B, 
which employs the same amount of capital, makes the same 
net profit and has an annual gross income of $5,000,000. A 
turns its capital once in two years. B turns it five times in 
one year. At a rate of 1 per cent A would pay a tax of $5,000, 
which is V2 of 1 per cent of the capital employed, or 5 per cent 
of its net income. B would pay $50,000, which is 5 per cent of 
the capital employed and 50 per cent of its net income. One of 
the two businesses with the same investment and the same 
profits would pay a tax ten times as large as the other. This 
illustration is not extreme. There are numerous businesses 
involving large investment and many processes where the capital 
employed is not turned over as frequently as in the case of A. 
On the other hand, it is a well-known fact that it is common 
practice in certain lines of business for retailers to turn their 
capital as often as ten times annually. 

The conclusion thus indicated is confirmed by some very 
interesting figures supplied by one of the members of the Com- 
mittee. He directed one his assistants to run through his client 
files and to schedule the gross sales and net income in each 
case where the file included a copy of a recent income tax 
return. In this way he secured exact figures for twenty-six 
concerns located in all parts of the country, engaged in seven- 
teen different industries, selected entirely by chance, and repre- 
senting, it is thought, the typical ''run of the mine." (For 
complete schedule see Appendix B.) 

These few concerns afforded three instances where a tax of 
only 1 per cent of the gross sales would have been equivalent to 
between 20 per cent and 30 per cent of the net income, and 
sixteen other instances in the past three or four years where 
such a tax would have been equivalent to between 5 per cent 
and 20 per cent of the net income. These are actual figures 
of actual cases. It is startling to contemplate the disparity 
in these cases if the taxpayer should happen also to be unable 
to shift the tax to the consumer. 

The Committee is forced to the conclusion that a tax on 



TAXATION 131 

net income is a far safer one for business than a possible tax 
on gross income, and that, after the abnormal years we have 
passed through, it is unwise to risk embarking upon such a 
dubious experiment at a time when every effort should be 
directed toward regaining normal and more stable conditions. 

5. It would be an unfair discrimination to relieve corpora- 
tions of all but the sales tax, while compelling partnerships 
and sole proprietors to pay normal income and surtaxes on 
their business income. 

Under existing tax laws corporations pay an excess profits 
tax (the righest rate of which is 40 per cent) and an income tax 
of 10 per cent on the balance of the net income, while partners 
and sole proprietors pay on their entire income, including their 
business income, a normal tax of 8 per cent and surtaxes the 
highest rate of which is 65 per cent. The difficulty, amounting 
to practical impossibility, of separating the business income 
from the personal income of a partner or sole proprietor, has 
been demonstrated in the single year to which the Revenue Act 
of 1917 applied, under which the partnership and individual were 
subject to the excess profits tax. The Bureau of Internal 
Revenue is still loaded down with many unsettled cases turning 
on the question of what is or is not business income in the case 
of an individual. If, however, the partner and sole proprietor 
are not or cannot be entirely relieved of the surtaxes on business 
income, then when the excess profits tax is repealed some other 
tax should be levied on the income of corporations to compen- 
sate for the surtaxes paid by other forms of business. A sales 
tax paid by both would only add to the burden on the individual, 
and not in any way lessen the discrimination, because other 
forms of business would pay it in addition to the surtaxes. 

The Committee recommends an increase in the corporation 
income tax as the simplest way in which the taxation on corporate 
income may be roughly equalized with the taxation of other 
business income, taking the latter to be saved and invested 
income subject to the reduced surtaxes recommended by the 
Committee. 

6. A sales tax would tend to bring about undesirable changes 
in business practices. 

The cases cited above, showing what would occur in the 
cotton industry, the shoe industry and the tool industry, illustrate 
the effect of a sales tax on small manufacturers and many classes 



132 SELECTED ARTICLES 

of middlemen. It is to be questioned whether the Government 
should levy a tax which would be in effect a bounty on combin- 
ations and which would drive out of business many classes of 
so-called middle men who perform a service which is well worth 
what it costs. Devices to get around the tax through the 
avoidance of technical sales would be multiplied. Consignments 
of goods to selling agents instead of to wholesale distributors, 
contracts for future sales, leases and rentals would take the 
place of the economic process of a direct sale at each step of 
distribution. It is not thought that either manufacturers or 
distributors would welcome a situation in which, in order to 
avoid a tax on a technical sale, the manufacturer might be 
induced to consign his goods to wholesale dealers as his agent 
or, where his capital was not sufficient to do this, be required 
to meet the competition by paying not only the tax upon his 
own sale, but the tax upon the sale by the wholesaler. It is 
asserted that the cost of distribution would be reduced by the 
elimination of certain middlemen through the imposition of 
this tax. Even if this should be the case, is it just or proper 
or economically sound for such a result to be brought about 
by a temporary tax rather than by the natural development of 
a more efficient method of distribution? These results would 
occur regardless of whether or not the tax were shifted, because 
the business which avoided one of the taxable steps would 
secure that much additional profit if the market was based 
upon the costs of competitors who paid the tax and passed it 
on. 

Assistant Secretary of the Treasury Leffingwell, in recently 
commenting on the difficulty of estimating the yield of the 
turnover tax, well said that such a tax would in five years 
revolutionize present methods of doing business, because means 
of getting around the intermediate turnover tax would be 
devised and put into effect. Can business men look with 
equanimity upon a temporary tax which may change business 
practices that have proved their economic soundness by sur- 
viving the stress of competition? 

7. The administrative difficulties presented by a turnover 
tax are much greater than is generally realized. 

It is true that the problems of reports and collection would 
be simple except for their multiplicity. Even with the exemp- 
tion of street peddlers, boot-blacks and other small businesses. 



TAXATION 133 

through establishing a minimum exemption of $500 per month, 
there would be millions of returns that would require a large 
force of field and office auditors to check up. New and com- 
plicated problems would arise in the definition of what is a sale. 
Leases, contracts for sale, commission and agency arrangements 
would be stimulated. The present practice in some lines, of 
renting or leasing out the product instead of selling it, such 
as now holds in the case of shoe machinery, adding machines, 
coffee urns, etc., is capable of being largely expanded. Such 
practices with the purpose of avoiding the payment of the tax 
would present considerable administrative difficulty. The admin- 
istration of such a tax would raise serious problems, and the 
number of taxpayers would be so greatly increased that it 
would probably be difficult to prevent wholesale evasions. 

The Bureau of Internal Revenue has experienced the great- 
est difficulty in building up and maintaining a sufficient force 
of field agents and auditors to close the income and excess 
profits returns of the last few years. If these returns are to 
be disposed of within anything like a reasonable time, the per- 
sonnel of the Income Tax Unit cannot safely be depleted in 
order to build up the new organization required for this new 
kind of tax. It is essential to the success of such a tax that 
it be properly administered from the very outset, but the diffi- 
culties in the way of securing a sufficient and qualified per- 
sonnel are so great as to constitute in themselves a very strong 
argument against its enactment. 

8. The experience of other countries with a general sales 
tax, and the history of the movement for such a tax in this 
country after the Civil War, point inevitably to the conclusion 
that such a tax is a last resort, to be availed of only after other 
resources have failed. 

The discussion now going on relating to a general sales tax 
is closely paralleled by the discussion of the same object after 
the close of the Civil War. At that time such a tax at first 
found widespread favor, but the proposal was finally aban- 
doned after a careful study of the subject by the United 
States Revenue Commission, whose report to the Secretary of 
the Treasury was submitted by him to Congress January 29, 
1866. The Committee is also advised that both Great Britain 
and Italy have given most serious consideration to the proposal 
of a general sales tax, and that in both countries the conclu- 



134 SELECTED ARTICLES 

sion has been reached that such a tax is an absolutely last re- 
sort, to be availed of only in case all other sources of revenue 
prove inadequate. This despite the fact that the rates of 
the British normal income tax and of the business profits tax 
are higher than our own. 

A general sales tax is not new, as is generally supposed. It 
has been tried by many countries in the past, but every leading 
nation which adopted it has abandoned it and never resumed its 
use, except in the present case of France and Germany, which 
have resorted to it as a last extremity after exhausting every 
other means of raising revenue. The most recent reports con- 
cerning the French "taxe sur le chiffre d'affaires" are distinctly 
unfavorable. This tax went into effect only very recently and 
is relied upon to yield only about one- fourth of the total amount 
which is being raised from internal taxation. The difference 
in the financial condition of France, and in the form and the 
expected yield of the tax itself, and the French experience 
during the short time it has been in operation, are not factors 
encouraging to the adoption of a general sales tax in the United 
States. 

The Committee has not, however, overlooked the fact that 
modified forms of sales taxes are actually in effect in the 
Philippines and Canada, and in particular that favorable reports 
are reaching this country relative to the operation of the new 
Canadian taxes. 

Conditions in a country like the Philippines, where, aside 
from agriculture, productive industry plays such a small part, 
are so different from those in the United States that a comparison 
possesses little value. It is interesting to note, however, that the 
Philippine tax is called a "Percentage Tax on Merchants' Sales," 
and that exemptions from the tax include: 

1. Merchandise actually exported by the vendor ; 

2. Things, other than opium, subject to specific tax; 

3. Agricultural products when sold by the producer or owner 
of the land where grown, whether in their original state or 
not. 

It would appear that a very large part of this tax revenue is 
probably derived from sales of imports. 

The Canadian tax is in form a tax upon sales of finished 
articles by manufacturers, wholesalers and jobbers. It is so 
coupled, however, with other taxes upon the sales of a great 
variety of specified commodities at rates of 3. 5. I0 > 1 S, 20 an0< 



TAXATION 135 

50 per cent, in addition to a license tax on sales, and with such 
a long list of exemptions, that it has little resemblance to the 
proposal in this country for a general turnover tax. 

Exemptions from the Canadian sales tax include : Animals, 
living; poultry, fresh or salted; pickled, smoked or canned 
meats; canned poultry; soups of all kinds; milk, cream, butter, 
cheese, buttermilk, condensed milk, condensed coffee with milk, 
milk foods, milk powder and similar products of milk; oleo- 
margarine, margarine, butterine or any other substitutes for 
butter ; lard, lard compound and similar substances ; cottolene ; 
eggs ; chicory, raw or green, kiln-dried, roasted or ground ; 
coffee, green, roasted or ground; tea; hops; rice, cleaned or 
uncleaned ; rice flour ; sago flour ; tapioca flour ; rice meal ; corn 
starch ; potato flour ; vegetables, fruits, grains and seeds in their 
natural state ; buckwheat, meal or flour ; pot, pearl, rolled, roasted 
or ground barley ; corn meal ; corn flour ; oatmeal or rolled oats ; 
rye flour ; wheat flour or wheat meal ; sago and tapioca ; macaroni 
and vermicelli; split peas and pea meal; cattle foods; hay and 
straw; nursery stock; vegetables, canned, dried or desiccated; 
fruits, canned, dried, desiccated or evaporated ; honey ; fish or 
products thereof ; sugar ; molasses ; maple, corn and sugar-cane 
syrups and all imitations thereof ; ice ; newspapers and quarterly, 
monthly and semimonthly magazines and weekly literary papers 
unbound ; gold and silver ingots, blocks, bars, drops, sheets or 
plates unmanufactured ; gold and silver sweepings ; British and 
Canadian coin and foreign gold coin ; materials for use only 
in the construction of ships ; anthracite and bituminous coal 
and coal dust, lignite, briquettes made from anthracite or bitumi- 
nous coal or lignite, coke, charcoal, peat, wood for fuel pur- 
poses ; electricity ; calcium carbide ; gas manufactured from coal, 
calcium carbide or oil for illuminating or heating purposes ; fibre 
for use only in manufacture of binder twine ; ships licensed to 
engage in the Canadian coasting trade; artificial limbs and parts 
thereof ; donations of clothing and books for charitable purposes ; 
settlers' effects ; articles enumerated in Schedule C of the West 
India Agreement or articles purchased for use of the Dominion 
Government or any of the departments thereof or by or for the 
Senate or House of Commons ; "and the Governor in Council 
shall have power to add to the foregoing list of articles exempted 
from the tax on sales such other articles as he may deem it 
expedient or necessary to exempt from the said tax." 

If Canada has found necessary such numerous exemptions 



136 SELECTED ARTICLES 

and additions, those familiar with the course of legislation 
of general application will fully appreciate the many difficulties 
which would confront Congress in the consideration of a general 
sales tax. 

It appears that sober second thought in foreign countries 
and in this country after the Civil War has led to the abandon- 
ment of such proposals whenever possible, and already many of 
those who, at the beginning of the present agitation in favor 
of a general sales tax, were prominent advocates of such a tax 
have, after study of the question, become convinced that its 
adoption would be unwise. 

9. It would be economically unsound as well as socially 
unjust to shift $2,000,000,000 of taxation from business and 
personal income taxes to consumption taxes. 

A sales or turnover tax of general application has been 
described by one of its former proponents as a "most unblushing 
consumption tax." Those who claim that a sales tax would be 
shifted to the ultimate consumer propose that business and 
personal income shall be relieved of the payment of $2,000,000,000 
of taxes and this entire amount shifted to the consumer. One 
of the accepted principles of sound as well as just taxation is 
that it should bear some relation to the ability to pay. A tax 
at a uniform rate upon all purchases, while falling more heavily 
upon the largest spenders, would not bear any reasonable rela- 
tion to ability to pay. The great majority of our population 
must spend their entire incomes for the absolute necessities 
required to maintain a decent standard of living. Such a heavy 
tax on those possessing small incomes would be economically 
unsound because it would have the inevitable tendency to reduce 
the standard of living by raising the cost of living, and would 
consequently bring about a necessary curtailment of purchases, 
or else would have to be met by increases in their wages or 
other sources of income. 

It has been asserted by the proponents of the tax that the 
cost of living to the great mass of consumers would be actually 
reduced, because the tax would be small on each individual 
article and would be passed on in its exact amount, instead of 
being loaded as it is said the excess profits tax is loaded. 

These assertions will not bear investigation. Regardless of 
what the tax would amount to on each individual article, it is 
proposed that it should produce as a total $2,000,000,000, to be 



TAXATION 137 

paid by consumers rather than to be taken from the profits of 
business and personal income. It can be readily admitted that 
a low-rate tax at a fixed amount such as is proposed might not, 
when passed on, be loaded to as great an extent as the uncertain 
excess profits tax, but the mere fact that it is for a definite 
fixed amount is hardly sufficient basis for the conclusion that it 
would not be loaded (when it could be passed on) to as great 
an extent as the taxes proposed by the Committee. The very 
facts that the tax would be levied upon all sales, including 
initial sales of raw materials, and that its advocates estimate 
there would be an average turnover of about six times before 
the final sale to the consumer, would make it reasonable to 
expect some loading as the tax progressed. It is customary 
business practice to add a percentage to the cost of purchases 
in determining selling prices. If the cost of purchases is 
increased by taxes paid on prior sales, business organizations 
would probably find it necessary to load the tax to cover the 
cost of the extra investment, greater insurable value of the 
merchandise, etc., in cases where competition permitted them 
to do so. 

A second assertion that will not bear investigation is that 
the cumulative effect of a sales tax of 1 per cent at each turn- 
over would not be more than 2^4 per cent added to the cost of 
the finished article. Some statements place this percentage as 
high as 2>Va per cent. The only basis for this assertion which 
the Committee has been able to discover is the citation of the 
cumulative effect of such a tax on the sale of certain articles. 
All of these illustrations appear to deal only with the added 
cost of the principal raw material, and ignore entirely the 
effect of the tax on the other factors entering into the cost 
of producing or distributing the article. As an illustration, 
one widely-referred-to example is the application of this tax 
on the price of bread, which states "this total tax, if passed 
along, is so small, amounting to less than one-sixth of a cent a 
loaf, that it could not be added to the price per loaf to the 
consumer. It would probably be passed on by the miller and 
be paid by the baker, but would be such an infinitesimal reduction 
from his profits that he would be almost totally unaffected." 
The tax to be paid is arrived at by adding together the tax 
on the wheat when it leaves the farm, the tax when it leaves 
the miller and the tax on the bread when it leaves the baker. 



i 3 8 SELECTED ARTICLES 

Leaving out of consideration any effect the tax might have on 
the cost of producing the wheat on the farm, or the cost of 
milling it, it is easy to recognize that a calculation is entirely 
inaccurate which ignores the entire effect of the tax on every 
item in the cost of baking except the wheat. The baker's cost 
would be increased by the tax on the coal for his ovens, the 
tax on the bricks used for rebuilding his ovens and the tax 
on every single item purchased for the conduct of his business. 
Illustrations given of the effect of the tax on various articles 
of clothing make the same error of ignoring the effect of the 
tax on any item of cost except of the principal raw material. 
Statements based on such reasoning are manifestly unreliable. 
To whatever extent a sales tax could be passed on more readily 
than taxes on profits or income, it would increase the cost of 
living to those who do not pay these taxes. 

The proposal for a general turnover tax is coupled with 
a proposal to raise the exemptions from the income taxes. This 
would afford relief to a considerable deserving class. It would 
not, however, in any way benefit the great mass of people with 
incomes less than the present exemptions, who form the great 
majority and the extent of whose purchasing power regulates 
the demand for most commodities. It is not believed that when 
business men fully realize the effect of such a tax they will 
care to go before the rest of the country with any such proposal. 
Certainly they could not ask Congress to shift the burden of 
the taxes which they are now paying to the shoulders of con- 
sumers generally, without regard to their ability to pay. The 
Committee is convinced that business as business is willing to 
bear its full share of the tax burden, although not the excessive 
and unjust share which it is now bearing. The Committee 
recommends that, to the extent that it is necessary. to replace the 
revenue which would be lost by the reduction of corporation 
and personal income taxes, about 40 per cent should be replaced 
through an increase in customs duties, supplemented by addi- 
tional sales taxes, but it cannot sanction the shifting of from 
$1,000,000,000 to $2,000,000,000 to consumption taxes of this sort. 1 

1 The following extract from the Report of the Secretary of the Treas- 
ury, which has just been made public since the final meeting of the Com- 
mittee, confirms the conclusions already reached by the Committee: 
"Further consideration of the subject has convinced me that a general 
sales or turnover tax is altogether inexpedient. It would apply not only 
to the absolute necessities of life— the food and clothing of the very 
p 00r — but it would similarly raise the prices of the materials and equip- 
ment used in agriculture and manufactures. It would confer, in effect, a 



TAXATION 139 

10. While the Committee has not allowed political ex- 
pediency to influence it in reaching its conclusions, the political 
opposition to the sales tax must be given serious consideration. 

The Committee has been reliably informed that even though 
initial sales of farm products were exempted, there would 
be determined opposition on the part of agricultural interests 
and perhaps also on the part of labor interests to any form of 
general sales tax. The Committee would be hopeful that attacks 
upon sound registration could be overcome by education and 
discussion, but it feels that the sales tax is too vulnerable to 
justify attack and that its details, especially the question of 
exemptions, would present too great difficulties for such a hope 
in this instance to be realized. In view of the pressing need 
for immediate remedial legislation, it is desirable that those who 
have been advocating the sales tax should give this matter most 
careful reconsideration in order that they may unite in sup- 
porting a program of a kind which the Committee is convinced 
holds more promise of practical realization. 

The advocates of the sales tax claim for it all the advan- 
tages arising from the repeal of the excess profits tax and 
the reduction of surtaxes on personal income. The repeal of 
the excess profits tax and a reduction of the surtaxes are recom- 
mended by the Committee. Such claims, therefore, have nothing 
to do with the question at issue, which is whether the methods 
of raising revenue recommended by the Committee are fairer, 
safer and less objectionable than a general turnover tax would 
be. 

Compare the uncertainty as to yield and effect, the inequity 
as between different forms of business and the added burden 
to the poorer classes of our population, all inherent in the pro- 
substantial bounty upon large corporate combinations and place at cor- 
responding disadvantage the smaller or dissociated industries which 
carry on separately the business operations that in many combinations 
and trusts are united under one ownership. The group of independent 
producers would pay several taxes, the combination only one tax. Finally, 
it would add a heavy administrative load to the Bureau of Internal 
Revenue which — burdened as it is with the responsibility of enforcing the 
child-labor tax law, the national prohibition act, the narcotic-drug law, 
the adulterated butter and mixed flour tax laws — is already near the limit 
of its capacity. Simplification of the tax law and restriction rather than 
extension of its scope are as important from the standpoint of successful 
administration as from that of the taxpayers' interests. Consumption 
taxes, if used at all, should be laid upon other than absolute necessaries 
and restricted to a few articles of widespread use, so that the administra- 
tion of the tax may be concentrated and made relatively simple." — Annual 
Report of the Secretary of the Treasury for the fiscal year ending June 
30, 1920, p. 28. 



140 SELECTED ARTICLES 

posal for a general turnover tax, with the recommendations of 
the Committee to raise the revenue by increase in the established 
corporation income tax, the documentary stamp tax, customs 
duties, and, if necessary, an excise tax levied at some one point 
on the sale of a specified list of commodities, which while not 
absolute necessities, yet are in such strong, constant demand, 
that the tax would not so seriously affect the sale, as in the 
case of many commodities which would be included in a general 
sales tax. 

These are all taxes in the collection of which the Bureau of 
Internal Revenue has an experienced organization. No new 
form of tax is suggested, and, at the most, only a very few 
new objects of taxation. The increased revenue would be de- 
rived almost entirely from increasing taxes already in force, 
the effect of which increases can be forecast with considerable 
accuracy. A sales tax is a departure, the results of which or 
the revenue to be derived from which none can foresee. It is 
safer to increase the taxes which produce the least harmful 
effects than to venture into new and dubious fields of taxation 
at this critical period. It would be better for business men to 
unite on a praticable, conservative program for changes in our 
revenue laws which have a fair chance of accomplishment than 
to seek for a panacea which is uncertain, unjust and unattain- 
able. 

Tax on Retail Sales 

The objections to a sales tax at each turnover cannot be 
met by substituting a general tax on the sale of goods, wares 
and merchandise at some one point, such, for instance, as upon 
a final or retail sale for consumption and use. 

The contentions of organizations of retailers that such a 
tax in many cases could not be shifted, and that it would 
necessarily have to be so large (estimates being not less than 
3 per cent) that it would put many of them out of business, are 
well founded. It is customary for retailers in many industries 
to turn their stocks from five to ten times a year. The cumula- 
tive effect of such a tax would exhaust the net income in any 
case in which it could not be shifted, and there are many items 
on which a tax of 3 per cent could not be added to the price. 
To meet this objection the proponents of the tax assert that 
the retailer can equalize such cases by adding 3 per cent to his 
cost of doing business and distributing the tax over the articles 
which will bear it, just as he distributes any other item of cost. 



TAXATION 141 

The retailers on the other hand maintain that this cannot be 
done and that if a sales tax is to be levied it should be levied 
on manufacturers and wholesalers as well as upon them. 

A greater difficulty, however, is the determination of when 
a sale is a sale for consumption or for use. Sugar sold to a 
householder is probably for final consumption, but sugar sold 
to a candy manufacturer is part of his raw material. An 
automobile tire sold to an owner is for final use, but it could 
not properly be so considered when sold to an automobile 
manufacturer, in which case its full cost would again be taxed 
upon the sale of the completed car. Coal sold to a householder 
is probably for final consumption, but where would the line be 
drawn in case it is sold : 

1. To a gas company for making gas? 

2. To a steel company for making its own gas fuel? 

3. To a power plant for generating power for sale? 

4. To an electric railway? 

5. To a manufacturer for making his own power? 

If these are considered cases of final consumption or use, 
this tax becomes practically a turnover tax with all the added 
objections and inequities which would very possibly arise from 
its more or less hit-or-miss application to many but not to all 
turnovers. If they are not so considered, then an elaborate 
system must be devised to establish the use to which the coal 
is put in order to secure exemption from the tax. The num- 
ber of commodities with respect to which a similar situation 
would arise is inexhaustible, and their very multiplicity pre- 
sents a difficulty which is practically decisive. Although such 
a tax levied on all sales would be impractical, there are many 
commodities on which a sales tax could be levied at some one 
point in their course from the raw material to the consumer. 
The Committee recommends the imposition of additional cus- 
toms duties and sales taxes on commodities which, while not 
absolute necessities, are of such widespread and general use, 
so well-established in their distribution, and the demand for 
which is so constant, that none of these qualities would be ad- 
versely affected by the imposition of the tax. The Committee 
feels it is better to select such commodities intelligently than to 
levy a general tax without knowledge or investigation of the 
effect or the practicability of collecting such a tax. 



142 SELECTED ARTICLES 



WHY NOT A SALES TAX? 1 

Ever since man has been living in communities with some 
form of government, taxation has been a live subject of discus- 
sion. The World War with its unprecedented expenditure of 
life and treasure brought, and has left with us, so many prob- 
lems of an apparently almost insoluble character or of such 
stupendous size that it is not surprising to find our tax situation 
in this country offering difficulties which seem almost impossible 
of satisfactory solution. Heroic measures were resorted to dur- 
ing the war to raise the enormous amounts of revenue which 
were indispensable to carry on the tremendous struggle. 

When it is realized that immediately prior to the armistice 
the United States was expending as much every sixty days as 
the North spent during the whole four years of the Civil War, 
that in an hour's artillery fire in France more ammunition, by 
far, would be fired than was used by both sides in the entire 
three days' battle at Gettysburg, and that all these things have to 
be paid for in some way or other, some slight conception is gained 
of the staggering financial problems which the war created. Never 
before has a war been, to so large an extent, a matter of organ- 
ization and of industry and support at home. The tremendous 
expenditures which were thus occasioned could be financed 
in only three ways: 

i. Loans. 

2. Issue of paper money. 

3. Levy of taxes. 

A number of reasons would readily be given why so con- 
siderable a part of the expenditure was financed by levying 
taxes of unexampled severity in both Great Britain and the 
United States. The excess profits tax, for which we were 
indebted to the ingenuity and resourcefulness of the British, 
was imposed from mixed motives. While on the one hand it 
was the backbone of war taxes, and in fact was indispensable 
to the carrying on of the war, it was imposed perhaps just as 
much in the first instance to satisfy British labor, which British 
statesmen feared would not continue to support the war if 
capital appeared to be unduly profiting thereby. With all the 
defects of the war and excess profits taxes, and those who 

1 By Walter A. Staub. Administration. 1:491-503. April, 1921. 



TAXATION 143 

advocated them appear to concede the presence of many defects 
about as readily as those who may have unwillingly accepted the 
taxes, it was fortunate for the Anglo-Saxon nations that so 
considerable a part of our war expenditure was defrayed from 
taxes instead of through still more loans or by a resort to an 
inflated currency. 

The relatively strong financial position of the United States 
and Great Britain today is due in no small measure to the 
courageous manner in which so considerable a portion of the 
current income of the people in each country was applied to the 
payment of war expenditures instead of deferring the evil day 
of settlement as long as possible through still greater loans and 
the unlimited issue of paper currency. The financial position 
of Germany today would be much stronger, if, instead of rely- 
ing on the indemnity she expected to collect from the defeated 
Allies and levying taxes to only a moderate extent, she had 
laid taxes on war profits in the same measure that was done 
in Great Britain and America. France, too, failed to levy taxes 
to the same courageous extent that Britain did, though an 
extenuating circumstance, not to be overlooked, is that the 
defaulting by Russia of the interest on her bonds, which were 
so largely held in France, made tremendous inroads on the 
income of France and greatly impaired the tax-paying ability 
of her citizens. 

Sad to say, many of the burdens imposed by the war will be 
with us for years and years to come. The signing of the 
armistice did not bring to an end the need for further large 
expenditures of money by the various governments. In our own 
country the war debt created in less than two years' time now 
calls for an annual expenditure of interest (without allowing for 
any offset of interest to be collected from loans to our allies, 
the payment of which cannot safely be relied upon for at least 
some time to come) equalling what before the war was considered 
a huge national budget, that is, approximately $1,000,000,000. The 
$1,000,000,000 pre-war budget included not only the expenditures 
of non-revenue producing departments of the national govern- 
ment, but also for the post-office and for much "pork" for all 
kinds of river and harbor improvements, post-office buildings, 
and similar public works which congressmen love to secure for 
their home districts. Not only do we have the additional annual 
burden of war loan interest on top of the pre-war government 



144 SELECTED ARTICLES 

expenditures, but the current expenditures of the government 
for non-war purposes have not yet been reduced to a pre-war 
basis. Also, the "mopping up" expenditures following the war, 
i.e., settlement for canceled contracts and war claims of all 
kinds, shipping board losses, etc., will probably continue in 
considerable amounts for some time to come. 

The large national expenditures, including a floating debt 
which is hanging over our heads and which there seems to be 
a fear of attempting to fund, call for national revenues for 
the next several years, so the Secretary of the Treasury cal- 
culates for us, of approximately $4,000,000,000 per annum. This 
is about four times the largest pre-war budget, which as already 
stated had included such expenditures as those for the post- 
office which brought in a considerable revenue. The $3,000,000,000 
more which we shall need to pay out for each of the 
next few years, in addition to the pre-war budget, will bring 
in but little income to offset expenditures. The only offset 
will be the reduction in interest charges due to paying off the 
floating debt and such part of the Victory notes as may be 
redeemed and not funded at maturity in 1923. 

When one looks at this tremendous amount to be raised 
and thinks of the heavy taxes that, no matter what their form, 
must be laid, one yearns for those days when the corporation 
income tax was 1 per cent (we smile now when we think of 
how oppressive a tax of $50,000 on a $5,000,000 corporate income 
seemed in 1909) or for those modest and retiring surtax rates 
which under the 1913 law went only as high as 6 per cent on 
individual incomes of $500,000 and over. 

It did not take long to realize that, even though the war 
was over, heavy tax burdens would continue for a long time. 
Also, when the attack on the excess profits tax as being un- 
American, undemocratic, and tending to discourage business 
initiative grew strong. It was seen that before this tax could be 
abandoned it would be necessary for Congress to see some 
other way in sight by which the revenue necessary could be 
secured. Consequently, those who were eager to eliminate the 
excess profits tax, and at least to reduce very substantially the 
surtaxes on individual incomes, soon realized that such pro- 
posals would be considered only academic and would receive but 
little serious attention unless they were accompanied by practical 
suggestions for other means of raising the needed revenue. 



TAXATION 145 

Of all the proposals which have thus far been made for 
replacing the revenue which will be lost by abolishing the 
excess profits tax and reducing the higher surtaxes, or by such 
sources of revenue drying up, the proposal of a sales tax has 
been pushed with the greatest vigor and supported by more 
energetic and extensive propaganda than any other. 

The sales tax as pictured by those convinced of its practi- 
cability is most alluring. In effect we are told, on the one 
hand, that it is so simple that no one will have the slightest 
difficulty in making up his monthly sales tax return in a few 
odd moments one evening a month, that the tax will produce 
billions of national revenue, and that (Oh! joyful thought!) 
every penny of the tax will be passed on to the ultimate con- 
sumer, that elusive character who seems to be in a class with 
the missing link. On the other hand, we are led to believe that, 
even though the ultimate consumer is handed for payment as 
a part of his grocery, butcher, and haberdashery bills, such a 
small amount of tax thereon as anywhere from $1,000,000,000 to 
$6,000,000,000, the tax will spread out so thinly over our large 
population that nobody will feel it and that the difference in 
the family exchequer will not be any more noticeable than if 
a few more dimes and quarters had been spent for amusement 
this week than last. 

All jesting aside, if it were possible to institute a sales tax 
which would accomplish only 50 per cent of what is claimed 
for it, it would be a wonderful source of revenue. Unfortunately, 
the very ease with which it is claimed such a tax could be 
levied, would be a temptation, when the insistent need for 
large revenues has somewhat abated, for the raising of public 
funds in unnecessary amounts. Such funds would be in 
danger of being squandered for non-essential public purposes 
as is so often the case when a government has more liquid 
funds than it really needs. 

The purpose of this article is to examine briefly the claims 
which have been made for the sales tax, and to discuss them in 
the light of those difficulties which it has been pointed out 
would be likely to be encountered in attempting to institute 
and administer such a tax. 

Before proceeding to the consideration of the matter in detail 
it is to be pointed out that several different kinds of sales taxes 
have been advocated. There is the general turnover tax which 



146 SELECTED ARTICLES 

proposes to levy a tax of say, not over I per cent, on absolutely 
all sales or turnovers including not only commodities or mer- 
chandise in every form but also capital transactions, such as 
sales of real estate and securities, services such as those ren- 
dered by lawyers, architects, and other professional men, and 
rents and interest. In sharp contrast to the general turnover 
tax is the retail sales tax which proposes to levy a tax of say 
i per cent (presumably, however, the rate would have to be 
higher if anything like the same amount of income is to be 
secured as under the general turnover tax) on those sales which 
are made to the ultimate consumer, in other words retail sales. 

Between these two plans is still another which would lay 
a tax on all sales excepting those which represent turnovers 
of capital or which are service earnings rather than sales of 
merchandise. 

The principal arguments urged in support of the plan for 
some one of the three forms of sales tax mentioned above have 
already been alluded to. They are briefly : 

That the tax would be extremely simple of calculation and 
of collection. 

That the tax would not be a burden to business as, being 
at a uniform rate on all sales, it would be passed on to the 
purchaser, either as a specific item or as a part of the sales 
price. 

That the tax would be so small that it would not be felt by 
those who eventually have to pay it, namely, the ultimate con- 
sumer. 

Other arguments for the enactment of a sales tax are really 
only variations of these three. 

Let us now hear from those who have wondered why such 
a perfect tax has not long since been discovered and adopted 
by all progressive nations and who feel certain that there are 
fallacies in the arguments which have made this tax so alluring. 

For purposes of- discussion, simplicity of calculation may 
for the moment be conceded for the general turnover tax. The 
moment, however, we depart from a tax which is imposed upon 
absolutely every turnover of every description, difficulties of 
calculation involving construction and interpretation of the law 
will surely arise just as much as, and perhaps even more than, 
has been the case under our excess profits tax acts and even 
under the relatively simple income tax laws. The difficulties 



TAXATION 147 

involved in determining, in the case of the retail sales tax, which 
sales are to ultimate consumers and which are to others and, 
therefore, not subject to tax, can easily be imagined. The oppor- 
tunity for evasion would in all probability be greater under a 
retail sales tax than is the case at present with reference to 
income taxes. In principle it is a simple thing to record sales. 
Yet it is an astonishing fact that many business concerns and 
particularly the individual retail merchant have very defective 
sales records. Those who have struggled with the analysis of 
an old-fashioned merchandise account in which all possible 
varieties of transaction, debit and credit, have been intermingled, 
may have some conception of the difficulties of calculation and 
administration where each sale is to be allocated to either one 
of two groups: one, the goats, those to the ultimate consumer 
on which the tax is to be paid, and the other the sheep, those 
which are not responsible for imposing a burden on either buyer 
or seller in the way of sales tax. 

What might be termed the merchandise turnover tax, that is 
the tax on all turnovers on merchandise, excluding capital 
transactions and charges for services, would also develop diffi-' 
culties of calculation and administration. Just where to draw 
the line between the sales subject to the tax and those not 
subject thereto because of being one of the excluded classes 
would develop perhaps as many perplexities as have resulted 
from the attempt to make invested capital a base for profits 
taxes. Where would the line be drawn? For instance, what 
would be done about exchanges of property or exchanges of 
merchandise? How about sales of machinery or other articles 
which may represent merchandise or income-producing sales to 
the seller but which represent a capital investment by the 
purchaser? 

Even the general turnover tax, with all its apparent sim- 
plicity, would offer difficulties not to be lightly brushed aside. 
There would almost certainly be exemptions created sooner or 
later for certain classes of sales or turnovers and, with any 
exceptions whatever, difficulties of classification of sales would 
at once arise. 

Difficulties of administration would arise through the incen- 
tive to arrange transfers of property and merchandise in such 
a way that actual sales would be avoided or deferred. For 
instance, leasing and consignment arrangements w r ould probably 



148 SELECTED ARTICLES 

be widely resorted to. Such arrangements in place of the out- 
right sale of goods to distributors would not be a wholesome 
development in the business world. Also, it would tend to 
increase unnecessarily the difficulties of those with only a 
moderate capital, sufficient for their business under present 
methods of distribution but inadequate for carrying goods on 
a consignment or lease basis until disposed of by the distributor 
to the retailer. Competition would tend to drive businesses 
generally into such arrangements to a considerable extent. 

Assistant Secretary of the Treasury Leffingwell is quoted as 
having said that a turnover tax would in five years revolutionize 
present methods of doing business, because means of getting 
around the intermediate turnover tax would be devised and 
put into effect. Changes in business methods should, however, 
come as a result of economic improvements and increased effi- 
ciency, not as the result of a desire to avoid a tax imposed on 
business and tending to hamper it. 

The questions which have been raised, as to whether in fact 
the calculation and collection of the tax would prove to be as 
simple as proponents of the sales tax believe, are not as serious 
as those which relate to the burden on business or the possible 
unfair distribution of the tax among the people who will even- 
tually pay it. 

Students of taxation and those who have had wide oppor- 
tunity for observation of the working of the taxes in practice 
have challenged very sharply the claims that the imposition of 
a uniform rate of tax would be absolutely fair as between one 
industry and another, and that in any event the tax could not 
be burdensome to business as it would be shifted to the con- 
sumer and none of it would thus be borne by business as such. 
The first proposition involves the second because, if the tax 
would invariably be shifted, it would make but little ultimate 
difference to business how much the tax was, excepting for the 
temporary inconvenience perhaps, of having to pay over the 
tax from month to month while part of it was still in the form 
of accounts receivable yet to be collected from customers. 

That the shifting of the tax would not be the simple matter 
which has been assumed by its proponents seems to be quite 
evident upon consideration of a few every-day facts. It would 
be natural to assume that every expense incurred by a manu- 
facturing or mercantile business would in due course be shifted 



TAXATION 149 

to the purchasers of its products or merchandise. Surely no 
manufacturer or merchant wants to absorb any expenses which 
are incurred in the manufacture or sale of goods and yet in 
practice this is exactly what does happen to many concerns. 

Figures recently published by the Commissioner of Internal 
Revenue show that during 1918, a year of wonderful business 
prosperity, more than one-third of the corporations in the United 
States made no profits whatever. Those corporations which 
did report profits showed great variations in the amount realized. 
Not only was there variation between industries, but individual 
corporations in the same industry showed a great difference 
in profits realized. If in a sellers' market, when prosperity was 
enjoyed by many concerns which for years before the war had 
not earned a fair return on the capital invested in them and 
when corporations were supposed to have passed on the excess 
profits tax to their customers time and time again, over one- 
third of the corporations of the country earned no profit at all, 
is it reasonable to suppose that under competitive conditions (to 
which we are rapidly returning, if in fact we have not already 
arrived), every business concern will invariably succeed in 
passing on the sales tax to its customers, and this neither more 
nor less than the amount of the tax paid by it to the government? 

How would public utilities whose rates are regulated by law 
pass on the tax? Or even if a street railway, which charges 
anywhere from 5 to 10c. per ride, is authorized to pass on the 
tax, how is it to do so in practice? On a 5c. fare the tax would 
be only 5/100 of a cent ; if a full cent additional is collected, 
the tax is being passed on twenty fold, whereas if it is not 
passed on because of its trifling amount in the case of the 
individual fare, it would aggregate a large amount in the total 
gross earnings and impose a heavy charge on the net profits. 

In an editorial in the New York Times of February 5, 1921 
entitled, "The Profits Tax Must Go," appeared the following 
statement : 

A flagrant instance of the vicious character of the tax imposed upon 
corporations in this country is disclosed in the annual statement of Mont- 
gomery, Ward & Co. of Chicago. With net sales in 1920 amounting to 
$101,745,270, the company shows losses of $7,855,278, including deprecia- 
tion. Yet during this year of loss the Federal Government took from the 
company $860,326 in taxes upon business of the year 19 19. 

The writer of the editorial apparently overlooked the fact 
that with 1 per cent sales tax in force the company would not 
have paid $860,326 of profits and income taxes upon the profitable 



150 SELECTED ARTICLES 

business of the preceding year, but a $1,017,452 tax on the 
sales of the current year. Also, he overlooked the fact that 
had the year 1919 not been a profitable one for the company, 
it would not have had to pay excess profits and income tax, 
whereas the sales tax, had one been in force, would have had to 
be paid regardless of whether the year's business resulted in a 
gain or in a loss. 

If the reply were made that had the sales tax been in force 
it would have been passed on to the company's customers, the 
question may well be asked, why was not the loss of $7,855,278 
passed on? The same circumstances which caused this company 
to lose money on its 1920 business would in all probability 
have caused it to forego, whether it wanted to or not, the passing 
on of the sales tax to its customers. 

If the sales tax cannot be invariably shifted in its entirety 
it becomes a tax on gross earnings and would in very many 
businesses be far more burdensome than the excess profits tax 
has been. Mam* businesses, particularly in lines handling staple 
commodities such as meats, groceries, dry-goods, hardware, and 
the like, are conducted on very small margins of profits. The 
published reports of Swift and Company, the meat packers, show 
that during the ten years from 191 1 to 1920 the highest net 
profit per annum on sales was 3.96 per cent in 1917 and the 
lowest .44 per cent (less than 1 per cent) in 1920. Before the 
war there were many mercantile businesses which were thought 
to be doing very well indeed if they cleared net from 2 to 3 
per cent on their gross sales for the year. A uniform rate of 
tax for all businesses regardless of the fact that some are 
conducted on a margin as low as that mentioned, while in some 
other lines, such as special manufacturing or the like, the rate 
of net profit may even in normal times be from 10 to 15 per 
cent of the sales, shows how unfair a uniform rate of tax 
would be. 

The continued emphasis on the low rate of a sales tax is 
likely to mislead one who does not give the matter very* thorough 
consideration. It must continually be borne in mind that the 
tax is on gross business and not on net profits. Hence, the tax 
while expressed in a small rate may nevertheless amount to a 
large percentage of the net profits, especially in the case of 
those businesses having a large turnover with a small margin 
of profit. Rain descends in the form of drops of water, each 



TAXATION 151 

drop small in itself, but when there are enough of them a 
cloudburst is the result. 

Aside from the injustice of imposing a uniform rate of 
sales tax on all businesses, regardless of the fact that some 
industries yield a much larger return per dollar of turnover 
than others, another discriminatory result appears because of 
the greater number of processes or operations performed by 
one business as compared with another. This question was 
thoroughly considered by the Tax Committee of the National 
Industrial Conference Board and was made the subject of the 
following illuminating comment in the Committee's report. l 

If a 1 per cent turnover tax w r ere imposed upon each step 
in the cotton industry it would fall upon the following sales: 

Raw cotton to ginning mill. 

Ginner to spinner. 

Spinner to mercerizer. 

Mercerizer to dyer. 

Dyer to weaver. 

Weaver to finisher. 

Finished cloth through agent to wholesaler. 

Wholesaler to retailer. 

There are many textile plants which buy the cotton from the 
ginning mill and sell the finished cloth through their own selling 
organization to the wholesaler and retailer, thereby eliminating 
one-half of these steps. It is claimed that the advantage which 
the large mill carrying on several consecutive steps would have 
over its smaller competitors, is small compared to the advantage 
which it now has through the profits made from each process. 
Such a contention ignores the fact that profit should be measured 
as a percentage on the business investment, and that a business 
concentrating on one process and investing all its money in 
that one process may earn as large a return on its capital as 
the competitor who spreads his capital over several processes, 
and should, to be equally successful, earn as much profit on 
each process as competitors carrying on separate processes. 
Single-process businesses are therefore able to compete success- 
fully with those which carry on multiple processes. A turnover 
tax would discriminate against them. Regardless of whether 
the advantage which such a tax would give to the self-contained 
operator is large or small, it is questionable whether the 

1 Special Report No. 18. December, 1920. 



i 5 2 SELECTED ARTICLES 

Government should levy a tax that would have even a tendency 
to drive smaller enterprises out of business. 

A second illustration applies to the shoe industry. In cases 
where each operation is carried on separately, a turnover tax 
would be levied on the sales of : 

Hides to tanner. 

Tanner to leather merchant. 

Leather merchant to shoe manufacturer. 

Shoe manufacturer to jobber. 

Jobber to retailer. 

Retailer to consumer. 

At least one large shoe manufacturer tans his own hides and 
sells the finished shoes through his own chain of retail stores 
to the consumer. It has been estimated by one of the prominent 
advocates of the sales tax that in this case the cumulative tax 
saved by the large shoe manufacturer would be approximately 
3 per cent. This is undoubtedly an underestimate, but the 
Committee is informed that 3 per cent on their gross sales is 
as much as the average net profits of some leading shoe manu- 
facturers in pre-war times, as shown by the published reports 
of their earnings. 

A third illustration is offered by following the course of 
any common tool, such as a shovel, pick or axe, through the 
two extremes of the greatest compared to the least number of 
turnovers. In the one case the tax would be paid on the sale of : 

Iron ore, limestone and coke to make pig iron. 

Pig iron and coke to make steel ingots or billets. 

Steel ingots or billets sold to rolling mill to make bar steel. 

Bar steel sold to tool manufacturer. 

Tool sold to wholesale dealer (the customary practice). 

Tool sold to retailer. 

Tool sold to consumer. 

If a certain well known corporation which combines all the 
steps from ore to bar steel furnished the steel to the tool manu- 
facturer and he sold it to one of the large mail-order houses, 
there would be only the tax on the sale of the bar steel, on the 
sale of the mail-order house, and on the sale to the consumer. 

It ma}* be claimed that the first three taxes are so small a 
proportion of the cost of the tool that their elimination would 
make little difference. It must be borne in mind, however, that 
this same elimination would occur in many of the other items 
of cost in the manufacture of the tool. It would apply to the 



TAXATION 153 

manufacturer of the handle. One manufacturer might make 
the handle from his own timber, cut and shipped by his own 
men, and another might have to buy handles made from timber 
bought from timber owners, cut and shipped by handle blank 
makers, and turned into handles by a handle maker, thereby 
paying three taxes. It would apply to coal for power, which in 
one case might be shipped directly from the mine and in another 
case pass from the mine owner to the commission merchant, 
to the coal dealer, to the manufacturer. It would apply to the 
belting to drive the machinery, to the machinery itself when 
purchased, and to the countless supplies used to operate the 
factory. The elimination of any of the processes of distribution 
would, of course, eliminate the tax on substantially the total 
cost of the tool. Average records in the hardware business 
show that the wholesaler who distributes such tools does not 
in normal times realize net profits of more than about 2^ per 
cent of his gross sales, so that the elimination of this one tax 
through sales directly to a retailer would be equivalent to about 
40 per cent of the net income derived from such sales by a 
wholesaler. How could such a tax be shifted in competition 
with those who do not pay the tax? Supposing that a general 
sales tax would be figured by every business as an item of cost, 
can it be assumed that certain businesses would be able to shift 
a tax which their competitors did not have to pay? 

Even if it were generally conceded that the tax can be 
passed on to the consumer in its entirety, that it will, therefore, 
not be burdensome to business, and that the rate, even though 
uniform for all lines of businesses, is not material, the serious 
question still remains whether the tax, when it is eventually 
paid by the consumer, results in a just distribution of the 
country's tax burden. This is the viewpoint from which per- 
haps the most serious attack has been made on any form of 
general sales tax. One of the fundamentals of wise taxation 
which has become increasingly recognized from the days of 
Adam Smith down is that a tax should be levied according to 
ability to pay. So long as in the- apportionment of the country's 
produce — the result of productive effort — we make a discrimin- 
ating distribution, i.e., a larger portion to him who renders the 
larger service, or in other words, reward according to ability 
to earn or serve, we must expect to apportion the fiscal burdens 
of the country in like manner, i.e., according to ability to pay. 



154 SELECTED ARTICLES 

A tax on consumption does not fall according to ability to 
pay but in reality is laid according to one's needs. The mere 
fact that within certain limits one may increase or decrease his 
consumption does not really alter the situation. The great 
majority of the population of any country are people who with 
their best efforts earn but a modest income and are bound by 
circumstances to disburse the major portion of it as fast as 
earned for necessary living expenses. To be sure, during the 
war certain classes of workers enjoyed most unusual prosperity 
and spent their earnings, many of them, in an unusually extrav- 
agant manner. Opportunity for repeating the performance has 
disappeared for most of them and present business conditions 
give no hint of a recurrence in the near future. 

Assuming that wages have returned, as they are now in the 
process of doing, to a normal basis and that, saying nothing of 
workers who are out of employment, the worker is earning 
but little more than sufficient to maintain himself and his 
family, what is the effect of levying a sales tax which would 
produce say $2,000,000,000 annually? There are about one hun- 
dred million people, including men, women, and children, in the 
United States, and this amount of tax would mean about $20 
per capita. If the tax is to fall on consumption, that is, on 
needs rather than on ability to pay as indicated by income, why 
not save all the trouble of passing the tax through the myriad 
channels of hundreds of thousands of business enterprises and 
levy it directly on every man, woman and child in the United 
States? In other words, levy a poll tax of $20 per capita. This 
would mean that the workman having a family consisting of 
wife and three children (the average family in the United 
States is usually considered to consist of five persons, though 
the number averages probably higher among the poorer classes 
and lower among the well-to-do) would have to pay $100 poll 
taxes for the family. 

When it is remembered that before the war the average 
annual income of a w T orker in the United States was not over 
$700 — it was usually stated at a somewhat lower figure — and 
that even with the high cost of living during recent years it did 
not rise to more than $1,300, if that much, the hopelessness, 
not to mention the injustice, of attempting to collect such a 
tax from the working class is obvious. Of course, the con- 
sumption expenditures of the well-to-do average somewhat more 



TAXATION 155 

per capita than is the case among the wage-earners, but it is not 

likely that they would average enough higher to reduce the 

per capita out of a $2,000,000,000 sales tax to lower than $17 or 

$18 for the working classes. It is not to be overlooked that 

the living expenses of well-to-do people include items which 

would not be subject to the sales tax, such as wages of servants, 

while presumably but little which the wage-earner purchases 

would escape the tax. 

E. R. A. Seligman, who is perhaps the greatest authority on 

taxation in this country today, makes the following significant 

comment on this subject: 

The proposition now is to take off one of those three chief categories— 
the tax on excess profits — and remove the burden from profits, on wealth 
or income, and put it on the other or consumption side. This would, in 
my opinion, unduly shift the balance and bring us too near the position 
formerly occupied by all the aristocracies of old, and still reflected in 
some of the European countries. . . Why is it that England and 
America show their democracy, their real democracy, so much more than 
countries in the difficult position of Italy, or France, or Germany? There 
you will find throughout the war, and even now, the great mass of taxes 
imposed upon the consumption of the common man; whereas in England 
and in the United States during the Great War, as over against our ex- 
periences in the Civil War, the great majority of taxes are raised from 
wealth; that is, from those who can afford to pay, rather than from the 
consumption of the necessaries and comforts of life. . . After the 
United States, the two countries of the world which are making the most 
progress in fiscal reform are England and Italy — for Italy is doing better 
than France. When these two countries came to consider this problem 
they went into the question of a sales tax thoroughly and finally rejected 
it. On the other hand, the two big countries of the world that have 
adoped the sales tax, Germany and France, did so only as a last resort, 
after exhausting every other available source of taxation. . . Germany 
was forced to this sales tax in the last extremity, and in France the same 
is true. 

A sales tax on the sales of capital would ruin New York 
City as the financial center of the country. A sales tax on the 
necessaries of life would evoke a political struggle the like of 
which we have never seen in this country. 

The sales tax represents an attempt to put an undue, an 
extravagant burden upon the consumer, instead of on the pro- 
ducer or the possessor of wealth. 1 

Professor Seligman's reference to the history of sales tax- 
ation directs attention to the statements made by its proponents 
that the sales tax — presumably of the same general nature as 
that proposed for adoption in this country — is in successful use 
in the Philippines, Mexico, Canada, and France. The facts, as 
far as the writer has been able to ascertain them, appear to be 
about as follows: 

1 Extracts from statements to the Tax Committee of the National In- 
dustrial Conference Board. 



156 SELECTED ARTICLES 

PHILIPPINE ISLANDS. A former collector of internal 
revenue in the islands who lays claim to having drawn the plan 
for the sales tax in force there, attracted considerable attention 
by an address on the subject recently delivered before the 
Chamber of Commerce of the State of New York. He stated 
that the tax is being successfully administered, is the biggest 
revenue producing factor in the Islands and that it is satis- 
factory to taxpayers. 

For several reasons, however, the sales tax in the Philip- 
pines — even if it be granted that it is all its originator claims 
for it, though there are not lacking former residents of the 
Islands who do not concede all that is claimed for it — is of 
little help in indicating what the experience with a general sales 
tax in the United States would be. In the first place, there is 
comparatively little manufacturing in the Philippines ; the indus- 
tries are principally of an agricultural character and the other 
business is of that mercantile character which is naturally 
affiliated with agricultural pursuits. In the United States, on 
the other hand, manufacturing through many operations, start- 
ing from the raw materials and progressing to highly refined 
products, forms an enormous volume of the country's industry. 
It follows that, under the simple kinds of industry in the Philip- 
pines, involving relatively few turnovers between origin or 
arrival of commodities in the. Islands and their final consumption 
or exportation, pyramiding of the sales tax might not be great. 
In the United States, however, with its highly integrated indus- 
try, the number of turnovers between origin of the raw materials 
to the final consumption or sale to other countries would be so 
large that the pyramiding or accumulation of sales tax through 
the various steps of production and distribution would be most 
serious. Furthermore, the inevitable discrimination against the 
single-process manufacturer in favor of the multiple-process 
manufacturer or combination manufacturer-distributor would be 
a most undesirable economic condition, an irritating element 
in the business organization of the country and a possible source 
of political disturbance. 

After considering the utter dissimilarity of business con- 
ditions in the Philippines from those in the United States, 
attention is to be directed to the yield of the tax in the Philip- 
pines. The annual report of the Collector of the Internal 
Revenue of the Philippine Islands shows that from revenue 



TAXATION 157 

collections aggregating during the calendar year 1919 approxi- 
mately $27,000,000 about $7,000,000 came from merchants, manu- 
facturers, common carriers, etc., as "license, business, and occu- 
pation taxes." This appears to be the caption under which the 
sales tax collections are included, though it is not clear that 
the $7,000,000 was produced entirely by the sales tax. 

Inasmuch as the population of the Philippines is approxi- 
mately eight million, the sales tax collections, the rate being 
1 per cent, were less than $1 per capita of population. At the 
same rate of collection per capita the annual yield in the United 
States would be less than $100,000,000, a comparatively negligible 
figure when considering the high sums of revenue we must 
raise for some years to come. On the other hand, advocates of 
the adoption of a sales tax in this country estimate the collections 
anywhere from $1,000,000,000 to $6,000,000,000. The lowest of 
these would amount to a per capita average of $10, more than 
ten times that realized in the Philippines, and the highest amount 
would average $50 per capita. A little study of these figures 
makes it obvious that it would be absolutely unsafe to base any 
experiments in the United States on the experience in the 
Philippines. 

MEXICO. Is it not rather humiliating to have the taxing 
system of Mexico held up to us as a model to be followed by 
the United States? The finances of Mexico do not give evidence 
of having been either well-planned or well-handled and while 
we all recognize that the continuous disturbances have in a 
measure been responsible therefore, it is to be borne in mind that 
none of the Latin countries of modern times has been so suc- 
cessful in dealing with national finances as to be a model to 
the Anglo-Saxon nations. 

Incidentally, H. B. Fernald makes the positive statement 1 — 
that "It (sales tax) can be eliminated; it can be gotten around. 
The experience in Mexico has shown that conclusively, and 
therefore it is a tax which will be paid by the small man, while 
the large man, who is able to change his business organization 
can avoid it." 

CANADA. The sales tax in Canada, whatever it may orig- 
inally have been intended to be is not at all the kind of general 
sales tax which has been ardently advocated for imposition in the 
United States. Many foodstuffs, coal and other necessities, are 

1 Congressional Record. 60:2474. 



i5» SELECTED ARTICLES 

exempt from the tax, the law grants power to the Governor 
in Council to add to the exemption list, the tax is imposed on 
manufacturers, wholesalers, and jobbers (not on retailers), and 
while nominally at a uniform rate is in fact in addition to 
numerous excise or luxury taxes at varying rates previously 
imposed on many of the same commodities. 

Also, it is not to be overlooked that the Canadian tax is of 
very recent origin and has not been in effect long enough to 
serve as a safe basis for conclusions as to its efficacy and the 
wisdom of this form of taxation. 

FRANCE. The sales tax in France is likewise of such recent 
enactment that conclusions respecting it cannot have a very 
satisfactory basis. From the standpoint of fiscal results, at least, 
it has been very disappointing. The August and September, 1920, 
collections were much less than one-half the amount estimated 
for the budget, which was ascribed in part to the newness of 
the tax. A recent issue of the Revue de Legislation Financiere, 
contains a statement showing that later collections, those of 
December, 1920, were still very unsatisfactory, being only about 
50 per cent of the budget estimate. Reports from France, also 
indicate that there is great dissatisfaction with the tax, not only 
on the part of the consuming public, but by the merchants. 

In concluding this discussion of the sales tax the writer 
would like to quote the following comment by Arthur A. Bal- 
lantine, formerly Solicitor of Internal Revenue, on the fallacies 
of the sales tax: 

"I believe that this idea of a sales tax, a tax collected 
everywhere, falling on no one, is a will-o'the-wisp which has 
floated over this field of taxation and which is in danger of 
luring business men who approach Congress in an effort to 
get really beneficial changes into futile action instead of con- 
structive action. 

"I believe that this committee, by the very careful and exhaus- 
tive consideration which it has given to the advocates of this 
plan and its careful thought as to conclusions, has done much to 
dissipate this myth and to direct the efforts of business men 
into practical channels instead of down a pathway which leads 
to futility." 1 

1 Remarks at a meeting of the Tax Committee of the National Indus- 
trial Conference Board; quoted in Congressional Record. 60:2473. 



TAXATION 159 



SALES TAX— AN INIQUITOUS PROPOSAL ' 

It is expected on every hand that the present session of 
Congress will in some manner revise the system by which federal 
revenues are derived. Whether the congressional rearrange- 
ment of taxation will be wise or unwise remains to be seen, 
but if congressional action in some other directions is to be 
accepted as a guide, it will require much effort to keep new 
taxation legislation from running wild. 

Perhaps the most iniquitous proposal that has been considered 
by congressmen in the field of taxation is the sales tax as a 
substitute for the existing excess profits tax. It would be 
difficult to devise a system of taxation more inequitable and 
more unjust than a sales tax. It would be far better to leave 
the system of taxation as it is even with all of the inequalities 
of the income and excess profits taxes than to substitute these 
with the sales tax. 

Under the sales tax as proposed, a tax would be levied on 
practically every commodity of general use and every turnover. 
That is to say, that every pound of sugar for example would be 
subject to a tax with every transaction from plantation to 
consumer. Illustrating the consequences of the sales tax, Con- 
gressman James E. Frear of Wisconsin, on January 31, 1921, 
said in a speech in the House : 

There are practically nine turn-overs in the case of cotton and woolen 
goods; eight turn-overs in the case of leather goods, and seven or eight 
in the case of steel, that is, from the original ore up to the time of the 
finished article; what applies to these articles applies with equal force to 
almost everything we use. In other words, this proposed tax of 1 cent 
on each turn-over has to be applied from five, six and seven to nine times. 
You will find that in many cases where the present tax on luxuries is 
imposed they have raised the price of the goods sometimes 400 per cent 
during the different turn-overs. 

Congressman Frear has not in any sense over-estimated the 
inequity of the sales tax. While all taxes rest more heavily upon 
the poor than upon the rich, the sales tax would be more unjust 
in this direction than any others. It is a matter of common 
knowledge that the purchases of the poor usually are made in 
small quantities and consequently at the highest prices. For 
that reason alone, the poor would pay on any given quantity 
or commodity a tax several times as large as the tax paid by 

1 By Samuel Gompers. American Federationist. 28:495-7. June, 1921. 



160 SELECTED ARTICLES 

the well-to-do, whose purchases would be smaller in number, 
but larger in bulk. 

The sales tax has no scientific justification and no utilitarian 
justification. It is nothing more than a hodge podge proposal 
conceived much as most of our tariff legislation has been con- 
ceived. Unless the object of Congress is to place upon the 
people the heaviest and most awkward burden possible, and 
to leave the question of revenue further from solution than it 
is at present, the idea of the sales tax should be abandoned 
immediately. 

There is room for improvement in both the income and the 
excess profits tax and it will be well for Congress to give some 
inheritance taxation. It is possible to so rearrange the income 
tax as to provide a more equitable distribution of the burden 
imposed and to take from the tax some of the inexcusable 
awkwardness that now attends its imposition and its collection. 
There has been, and there is, much agitation for the repeal of 
the income tax, or at least for higher exemption figures. If 
it is possible to raise the limit of exemption or to impose a 
lighter rate of taxation upon the lower incomes, that should be 
done, but the tax itself is right in principle and should be 
retained. The same is to be said in the case of the excess 
profits tax. Many large corporations and representatives of 
vested interests are endeavoring to secure the repeal of the 
excess profits tax because of the "burden" it is claimed to impose 
upon the corporations whose profits are large. They desire, of 
course, to escape as much taxation as possible, but while their 
efforts are understandable they should not be permitted to 
succeed. Experience should, by this time, have provided a guide 
to a proper rectification of the excess profits tax so that the 
burden may be more properly distributed and the total revenue 
increased. 

What has happened to the excess profits tax as it stands is 
that corporations have devised every possible method to escape 
payment by means of so spending their money as to dissipate 
their taxable excess. To do this corporations have plunged into 
great advertising campaigns far in excess of their needs, with 
the result that the amount of taxable excess has in many cases 
been reduced to an absolute minimum. Other corporations have 
entered into the construction of buildings and like projects 
purely in order to expend the surplus and avoid the payment 



TAXATION 161 

of tax. While this is beneficial from the standpoint of stimulat- 
ing business and industry, it is detrimental so far as federal 
revenue is concerned, because it defeats the tax and leaves the 
government without a revenue anticipated and upon which 
account has been taken. A moderation of the tax undoubtedly 
would result both in less hardship and in a greater revenue. 

Another method of taxation being considered by members 
of Congress is the land tax. There is much opposition to a 
land tax, and doubtless much misunderstanding of it. Perhaps 
no tax is more equitable than a properly administered land tax. 
It is doubtful whether the present Congress would agree to a 
land tax, but if it were possible, neither the wage-workers of 
the cities nor the farmers of the country should oppose the 
measure. The chief opponents of the land tax undoubtedly 
are those who hold large tracts of land for speculative purposes, 
and those who hold land valuable for its mining resources. The 
land tax constitutes a penalty upon idle and unused land and 
should rest comparatively light upon the owners of small prop- 
erties upon which they make their living. 

The principal concern at this time, however, is that the pro- 
posal for a sales tax be defeated. Of all forms of taxation 
either in existence or contemplation, none is more iniquitous and 
none would in the long run work greater injury to the masses 
of our people or develop greater resentment among them. If 
we cannot have a truly scientific program of taxation, let us 
at least not have the ultimate in chaos. 



SUBSTITUTES FOR THE PROFITS TAX * 

Excess profit appears to the New Republic an eminently 
proper subject for taxation. It is the income from which the 
state can take a share with the least hardship to the taxpayer. 
A profits tax, scientifically levied and efficiently administered, 
is from this point of view a good tax. Our present tax is 
imperfect, but one-half the energy that is expended in working 
for its abolition, if directed toward its amendment, could make 
an excellent fiscal expedient out of it. But in the field of 
taxation there is nothing that is absolutely good. One tax is 
merely better than another as one death is easier than another. 

1 New Republic. 22:304. May 5, 1920. 



162 SELECTED ARTICLES 

We are not asserting dogmatically that the excess profits tax is 
better than any other that could be substituted for it. We 
merely do not know of a better tax that will make up the 
$1,000,000,000 or more that can be got out of the excess profits 
tax. If any one will convince us that there is another tax 
equally productive, and fairer and less onerous in its incidence, 
we shall transfer our loyalty at once. 

Two proposals have of late received wide attention and much 
support among business men. They are for a tax on retail 
sales and for a tax on gross sales of whatever character. The 
tax on retail sales appears to us politically impracticable because 
of the high rate that would be necessary to yield $1,000,000,000 
of revenue. It is a generous estimate that the aggregate income 
of the American people is $75,000,000,000. Deduct from this, as 
the outside limit of spending power, all sums for reinvestment, 
all sums paid out for rents, travelling expenses, entertainment, 
personal service, etc., and the remainder can certainly not exceed 
$30,000,000,000 or $35,000,000,000. There must be further deduc- 
tion for evasions, and if petty trade receives any exemption — 
apparently a political necessity — the volume of taxable sales is 
not likely to exceed $20,000,000,000 or $25,000,000,000. A 5 or 
6 per cent tax, would be necessary to insure a revenue equivalent 
to the loss that would be entailed by the abolition of the excess 
profits tax. Certainly the retail dealer would not stand this loss. 
He would advance prices, in the first instance, and he would 
hardly content himself with the precise measure of the tax. On 
large sales he might, but on small ones he would not. How 
can a tobacconist recoup himself for y 2 c. tax on a cigar except 
by raising the price ic. ? 

It will be said that the retailers' costs will be lowered since 
the producers will no longer have to count excess profits taxes 
in making up their selling prices. Thus there might be an 
offset to the addition the retailer would have to make to his 
prices on account of the sales tax. But we have yet to see 
anything like proof that the businesses paying excess profits tax 
would lower their prices materially if relieved of the tax. They 
might do it if they had no other use for the money, but as a 
fact, they are busting with projects for using the money in the 
expansion of their business or in new investments. Such uses 
may be socially desirable, but they are something quite different 
from lower prices to the consumer. To substitute a retail sales 



TAXATION 163 

tax for the excess profits tax, therefore, seems to involve an 
unavoidable increase in the cost of living. And that is some- 
thing for which no shrewd political leader will lightly assume 
the responsibility. 

The gross sales tax presents the advantage of rates that look 
so low on paper that it seems almost un-American to object 
to them. The Bache Review, which reflects higher financial 
opinion in its eager advocacy of this tax, estimates the aggregate 
turnover of American business at $1,500,000,000,000. That in- 
cludes many items, such as speculative transactions in securities 
and produce, which the Bache Review would never think of 
taxing in the same manner as other sales. Such transactions 
obviously would not stand much of a tax. But they can hardly 
exceed $500,000,000,000. The remainder of $1,000,000,000,000 
may be halved, for the sake of safety, and yet leave a volume 
which under a 1 per cent tax would yield $5,000,000,000, almost 
five times the excess profits yield. What is the difficulty here? 
It must be plain that the consumer's ultimate spending power 
can expand into such prodigious turnovers only through the 
fact that most goods pass through many hands on their way 
to final use. A 1 per cent tax at each transfer would mean 
a huge addition to the final price and a great increase in the 
cost of living. That is not the worst thing about a tax of this 
kind. Businesses organized to carry the material all the way 
through to the consumer, like some of our great consolidated 
industrial concerns, would pay the tax only once. Businesses 
buying half manufactured goods for further manufacture would 
pay the tax several times. The tax would thus be a crushing 
artificial burden on the small concerns. It is hard to conceive 
of a tax more unsound, economically, socially and politically. 



WHERE IS THE TAX BURDEN GOING? J 

Under cover of a movement for what is termed "tax revision," 
a nation-wide propaganda is being conducted by various "busi- 
ness" organizations for the purpose of securing the abolition of 
the surtax on incomes and the excess profits tax. Behind their 
prattle about "oppressive tax burdens," and the need for greater 
economy in government, stands out one fact : the merchants, 

1 By Whidden Graham. Nation. 113:315. September ?i, 1031. 



164 SELECTED ARTICLES 

manufacturers, bankers, brokers, and corporations want to get 
rid of taxes that they are now paying, and are willing that the 
loss in revenue should be made up by a sales tax that will not 
only add the amount of the tax to the cost of living, but will 
compel the consumer to pay pyramided taxes and profits. The 
purpose of this accelerated demand for "tax revision" is there- 
fore clear — to shift taxes from those best able to pay, the small 
but influential minority, and lay them upon the general public. 
Now all this agitation is perfectly legitimate. If the financiers 
and big business men want to get rid of taxes, they have a right 
to agitate for legislation lifting their burdens. But their prop- 
aganda, based on disingenuous misrepresentations and abetted by 
a large section of the press, should be subjected to rigid inspec- 
tion by the public it is designed to impress. 

The main argument for repeal of the surtax on income is 
that this tax is one of the chief causes of "poor trade, tight 
money, diminished enterprise and employment." As it was stated 
by a prominent advocate of repeal in a speech before the Pitts- 
burgh Traffic Club: "Capital has been driven from the highways 
of trade because the Government lies in wait and exacts a large 
toll, going up to three-quarters of the wayfarer's income." This 
tax, he declared, forces the investment of capital in untaxed 
bonds, thus depriving trade and industry of capital urgently 
needed. 

Both of these statements are unfounded. It is not true that 
our present industrial depression, with its five million idle 
workers, is due to lack of capital caused by the income tax. In 
the first place, there is no immediate need for capital to build 
more mills and factories. Our existing factories in practically 
every line of industry can produce more goods in nine months 
than we can consume in a year. With thousands of mills closed 
or running on half-time, with many of those producing unable 
to find markets for their products, it is evident that what the 
country needs to restore prosperity is not capital for new indus- 
tries, but increased purchasing power by the one hundred mil- 
lion consumers. Present conditions, we are told, are due to 
overproduction. This also, of course, is not true. The real 
trouble is under-consumption, since millions of men and women 
need more and better food, clothing, furniture, and all kinds 
of goods. In any case, it is clear that putting more capital into 
industry could not materially help, so long as the mass of con- 
sumers cannot buy back the value of their labor product. 



TAXATION 165 

Nor is it true that investment of money in untaxed bonds 
deprives trade and industry of needed capital. If Mr. A., in 
order to escape taxation, buys a $1,000,000 worth of untaxed 
bonds from Mr. B., the latter has $1,000,000, which he will 
either loan or invest. The game of avoiding taxes by buying 
bonds cannot go on indefinitely. No matter how often repeated, 
the process ends as it began, with someone having $1,000,000 
to invest. There is no less money because of a change in its 
ownership. 

The arguments in favor of repealing the excess profits tax 
are equally unfounded. It is claimed that this tax is shifted 
to the consumer, and so pyramided, with added profits, that it 
adds 23 per cent to the cost of commodities. No proof of this 
assertion has ever been furnished, and the fact that the big 
corporations are spending money to have the tax repealed is 
fair evidence that they have not been able to shift it to the 
consumers of their products. If it were true that this tax is 
shifted, why are the corporations so anxious to get rid of it? 

As a substitute for the surtax on incomes and the excess 
profits tax the interests paying these taxes are urging the adop- 
tion of what is termed a sales tax, or tax on the manufacture 
and sale of goods. Various forms of this tax are advocated, 
but all agree that their purpose is to lift the taxes from great 
incomes and the excess profits of corporations. Against this 
proposal to add to the cost of living by taxing commodities the 
farmers and organized labor have vigorously protested, and their 
influence was sufficiently powerful to prevent the inclusion of 
any form of a tax on sales in the "tax-revision" bill passed by 
the House. 

The advocates of the sales tax are now concentrating their 
efforts on the Senate. It seems unquestionable that the surtax 
on incomes will be drastically cut — at least 50 per cent, according 
to the expressed views of the majority of the Senate Finance 
Committee, of which Senator Penrose is chairman. Senator 
Smoot, who holds ideas on tax revision materially at variance 
with the other members of this committee, is nevertheless also 
in favor of cutting surtaxes to a 32 per cent maximum "so as 
to discourage investments in tax-free securities" and a "3 per 
cent manufacturer's sales tax," which he describes as "to be 
imposed only on the manufactured article and therefore does 
not pass to the retailers or the jobbers." How a tax which 
raises the price of an article is to be exorcised from being 



i66 SELECTED ARTICLES 

passed on remains a mystery. Secretary Mellon has declared 
in favor of repealing excess profits taxes and with President 
Harding has even been demanding a retroactive repeal to last 
January I. Indeed the party in power is committed body and 
soul to the relief of "business." For the man in the street, for 
the average consumer, for the millions who, we are often told, 
"are America," whatever the Administration professes, it cares 
and does nothing. If there is one amendment to our present 
tax laws which ought to be made retroactive it is surely the 
raising of exemptions for men with large families, or the lower- 
ing of the percentage of tax charged on the first thousands of 
income. The Republican Administration, however, starts from 
the other end. Its chief concern appears to be the lowering of 
the tax burdens of the wealthy. And only a determined stand by 
the Senators from the great agricultural states, who recently 
have shown signs of intelligent cooperation, will defeat the 
purposed shifting of the tax to the consuming public. For there 
is no justification for the sales tax. It is impractical, costly, 
and wasteful in its administration, directly inhibitive of all 
efforts to reduce the cost of living, and designed merely to fill 
in the deficit which will inevitably confront the Treasury when 
the returns hitherto paid into it by corporations and individuals 
of means are cut off. 



DIFFICULTIES OF THE SALES TAX 1 

The favorite remedy for all the ills the taxpayer is heir to 
is the sales tax; and a number of brokers, investment bankers 
and other business men are conducting a systematic propaganda 
or "educational campaign" to spread the gospel. One disciple 
calls the tax on gross sales "An Ideal Tax" and quotes with 
approval an enthusiastic convert who says that "the gross sales 
tax idea is as simple as A B C." According to members of 
the Committee on Ways and Means who recently drafted a 
sales tax, the reports about its simplicity are grossly exaggerated. 

The sales tax has had a rather dark record in the history 
of taxation. Adam Smith regarded the alcavala, 2l Spanish 
tax on sales, as the cause of the ruin of the agriculture and 

1 By Thomas S. Adams. Needed tax reform in the United States. 
p. 14-16. 



TAXATION 167 

manufacture of Spain. The conglomerate group of sales taxes 
which we employed during the Civil War did not on the whole 
work satisfactorily. However, it is fair to infer that the failure 
of these taxes was due very largely to the heavy rates at which 
they were imposed; and the 1 per cent sales tax now imposed 
in the Philippine Islands is said by competent authorities to be 
a successful and satisfactory tax. 

A very great deal may fairly be said in favor of this pro- 
posal. The sales tax would perhaps possess the three greatest 
practical virtues which a tax can have ; it would carry a very 
low rate; it would be highly productive, and the taxpayer would 
know with certainty the amount which he was expected to pay. 
If shifted to the consumer, as it is usually but not always pre- 
dicted by its advocates, it would be paid piecemeal in small 
amounts as purchases were made. It would reduce the excessive 
dependence of the Treasury upon various forms of income 
taxation. These are great virtues and the low rate itself may 
fairly be said to counterbalance many of the weaknesses to which 
the sales tax, in common with all other taxes, is subject. 

Three General Forms 

Three general forms of this tax may be distinguished. The 
most inclusive — the general turnover tax — has, I believe, no real 
chance of adoption. Its yield at 1 per cent would be enormous, 
if not the $5,000,000,000 which have been claimed for it, cer- 
tainly over $2,000,000,000 a year at 1 per cent. But it can hardly 
be conceived that Congress would consent to apply a tax of 1 
per cent or even x /i of 1 per cent to every kind of sales — sales 
of farms and city homes ; of the plant, business and assets of 
huge corporations ; and of all other capital assets. It is really 
funny how each class believes that every other sort of business 
can bear such a tax. This is well brought out in the publication 
that calls the sales tax an "ideal tax." This proposes to 
apply the tax to all other turnovers except those "on the 
various exchanges — grain, cotton, stock, the sale of secur- 
ities, municipal, corporation and others." This exception 
is made by a brokerage concern. There are, of course, many 
reasons for exempting sales on exchanges, but there are equally 
good reasons for exempting many other sales. 

If sales of capital assets are eliminated, we reach the second 



i68 SELECTED ARTICLES 

form, a compromise between the general turnover tax and a tax 
on retail sales. Such a tax would yield from $700,000,000 to 
$1,000,000,000 a year at a rate of 1 per cent, according to the 
exemptions authorized. It would apply particularly to the sale 
of goods, wares and commodities whether for resale or not. It 
would thus have the cumulative or pyramiding effect frequently 
ascribed to all taxes on business. If there are on an average 
six turnovers between first production and final sale to the 
consumer, the 1 per cent tax would be imposed at increasing 
amounts six times. The tax would bear lightly on combinations 
or "trusts" which conduct under one ownership several of the 
operations usually carried on by independent business concerns. 
The combined business could undersell a group of independent 
concerns. The manufacturer who did his own jobbing would 
have a real advantage over his competitors who did not. The 
last characteristic is, in the words of one enthusiastic champion, 
"another virtue of the gross sales tax," and this advocate goes 
on to say that "a flat rate of tax on each commodity handled 
would, in the case of staples, eliminate a lot of rehandling and 
reselling of commodities." 

Tax on Final Sales 

The retail tax, or tax on final sales, would yield probably, 
at a rate of 1 per cent, from $350,000,000 to $450,000,000 a year, 
depending upon the exemptions. It would not apply to sales of 
capital assets, the pyramiding effect would be absent, and it 
would not foster combination. But it presents grave difficulties. 
The scheme depends for its success upon its generality and low 
rate. Bread, clothes, medicine and most necessities, when sold, 
are to be taxed. The tax rate is small and Congress is to be 
saved from the invidious task of selecting particular objects or 
classes for special taxation. This is the theory — but it almost 
certainly would not work out in practice. 

First of all, Congress would be practically forced to exempt 
newsboys, and other very small dealers. The sales tax recently 
formulated by the Committee on Ways and Means exempted 
gross sales of less than $500 a month and later sales than $1,000 
a month. Then we have the question of services. Should we 
tax the sale of bread and not the sale of the services of the 
actor or the lawver? What about the sale of water or the 



TAXATION 169 

services of public utilities such as transportation? Could the 
street railway shift a tax of 1 per cent, and if it could not is the 
average street railway company able to bear the tax itself? 
What of the farmer? His sales are exempt from the tax 
imposed in the Philippine Islands, and they were exempted in 
the bill drafted by the Committee on Ways and Means. But 
why? 

Limiting the tax to filial sales would create a difficult admin- 
istrative problem. Merchants and other dealers would-be required 
to secure affidavits from purchasers stating whether the goods 
were to be consumed or to be resold, either as bought or in 
some changed form. Would purchasers tell the truth? How 
about purchases of gasolene, coal and similar commodities or 
services which can be used either in business or for final con- 
sumption ? 

Certificates of this kind, distinguishing purchases for resale 
from purchases for consumption and use, are now employed in 
connection with some of the existing sales taxes ; but they are 
said to lead to considerable evasion. It is an even question 
whether such a device could be successfully administered. In 
any event, the sales tax, like the income tax, would depend 
almost wholly on the honesty of the taxpayer for its successful 
collection. Experience with the income tax indicates that the 
honesty of the taxpayer, particularly in case of the larger busi- 
ness concerns, is capable of withstanding the strain, provided an 
administrative force large enough to check and supervise the 
returns is employed. The administrative problem would be a 
huge one, with almost every business concern in the country 
which sells at retail subject to the tax. This administrative 
burden could not be successfully carried, in the writer's opinion, 
unless the tax were used to replace some existing tax which, like 
the excess profits tax, imposes a heavy administrative burden. 
Few things could be worse than adoption of such a tax followed 
by wholesale evasion. 

Consumer Would Pay 

Just who would pay this tax? The general assumption is 
that the consumer would paj r it, but the champions of the tax 
are at curious variance on this point. One advocate says on 



170 SELECTED ARTICLES 

for collecting a tax from his customer, that can be avoided by 
levying the tax against the merchant's net sales as they appear 
upon his books, leaving it optional with him whether he absorbs 
it himself or treats it as an item of expense to be passed along." 
Another equally zealous champion says in one paragraph that 
the tax would be "absorbed by the seller" and in the very next 
paragraph "that it w T ould be equally paid by everybody in the 
country." 

In the long run it is rather certain that such a tax would be 
borne by the consumer. But at present, with public opinion so 
inflamed about the high cost of living, and with a probable fall 
in prices imminent, it is probable that the tax in many instances 
would be borne by the dealer. It would to this extent become 
a business tax imposed without reference to ability to pay, but 
simply in accordance with gross sales whether there was any 
net profit or not. There is little or nothing to be said for a 
business tax levied simply in accordance with sales. And if the 
tax were passed on to consumers in the present state of public 
opinion, I have no doubt that in many instances it would 
strengthen the demands of wage earners for higher pay, act as 
an incitement to strikes, and in this way be passed along to the 
employers involved. While the cost of living remains so high, 
the sales tax is probably a political impossibility, as its recent 
treatment in the House of Representatives suggests. 

Sober-headed business men are sometimes intoxicated by a 
sudden vision of Utopia. This intoxication, as financial history 
amply proves, frequently leads to the championship of some 
"single tax." The legislative authority is to be spared all trouble 
by the blanket levy of a tax that is "as simple as A B C." But 
Congress could not work for one day on the sales tax without 
being forced to discriminate, to exempt certain classes and 
change the rate as applied to others. If we must discriminate, 
why not earn- the tax to its logical outcome — a tax on articles 
of consumption other than necessities, levied preferably on a 
few large industries which deal in non-essentials of wide-spread 
consumption, in order that the tax may be effectively and cheaply 
administered. The people revolt at the suggestion of a general 
tax on necessities. The administrator revolts at the idea of 
another general tax, applicable to hundreds of thousands of 
business concerns, which could be adequately supervised only 
with a small army of Federal employees. 



TAXATION 17 « 



A WAR SALES TAX DURING PEACE 1 

The proposition I desire to discuss is one which proposes 
to repeal the present tax producing about $800,000,000 annually 
under the excess profits tax, and imposing in lieu thereof a tax 
of $1,000,000,000 by what is known as a sales tax or a turnover 
sales tax. Every man in this House should be informed on that 
subject before he votes. 

I will say this briefly, that there have been several men 
before the Ways and Means Committee, intelligent men, very 
able men, advocating the enactment of a general turnover sales 
tax, which, as you know, is imposed in Germany and in the 
Philippine Islands and in Mexico, the only three countries that 
impose it effectually. There they tax the sugar and tea, and 
everything that they eat and drink, on every turnover that may 
be had. The ablest body of men that has met in this country to 
consider this subject, known as the National Industrial Confer- 
ence Board, has brought in a report showing how objectionable 
that system would be for this country. The United States 
Chamber of Commerce, through its tax board, acting intelli- 
gently and weighing all the arguments, has brought in prac- 
tically a similar report. 

Our Government is facing an annual tax burden five times 
the size of its pre-war expenditures. During the recent war 
large receipts were had from excess profits taxes on corporations 
and on personal income taxes due largely to the surtax. Congress 
now is facing a well-organized propaganda, based on assumed 
economic arguments for the repeal of the excess profits tax and 
for a reduction on income surtaxes. Another extensive, well- 
organized propaganda exists which demands the passage of a 
turnover consumption tax law with a sweeping tax on all neces- 
saries of life, which bill is pressed for passage by Otto Kahn, 
Jules Bache, Meyer Rothschild, and others who have appeared 
before the Ways and Means Committee urging a turnover sales 
tax. Practically no opposition arguments have been presented 
to the committee. 

Only limited study has been or can be given this vastly im- 
portant subject by the average Representative in Congress, and 

1 From speech of Honorable James A. Frear in the House of Repre- 
sentatives. January 31, 1921. 



172 SELECTED ARTICLES 

I am not assuming to speak against a sales tax from the stand- 
point of a tax student or tax authority, but from the viewpoint 
of a layman and legislator whose responsibilities are equally 
due to the banker, broker, and bricklayer, the capitalist and 
cobbler, the financier and farmer, the manufacturer and ma- 
chinist, the teacher and day laborer, all of whom to a greater 
or less degree will help pay the $5,000,000,000 annual tax here- 
after to be collected. 

I desire to place before you the views of recognized tax stud- 
ents and authorities and shall introduce my own observations only 
briefly and for the purpose of calling attention to matters that 
have seemed to me worthy of consideration ; but first as to the 
problems before us. 

From the report of the Secretary of the Treasury I quote 

figures that briefly set forth the situation confronting Congress: 

The gross public debt on Oct. 31, 1920, was $24,062,509,672 

Short-term debt in certificates of indebtedness Dec. 1.... 2,767,000,000 

War savings securities maturing January, 1923 800,000,000 

Victory notes due May, 1923 4,237,000,000 

In round numbers we must provide for $7,500,000,000 by Afay, 
1923. Whether by refunding or payment is a matter of policy 
to be determined. It is estimated that $1,250,000,000 must be 
raised by tax and set apart annually for interest and sinking 
fund. 

Of expenditures by the Government for the fiscal year 1920, 
reaching $6,403,000,000, the following items composing 90 per 
cent are significant : 

Secretary of Treasury Report, 1920, p. 48 

Purchase of obligations of foreign Government $421,000,000 

War Department 1,61 1,000,000 

Navy Department 736,000,000 

Shipping Board 531,000,000 

Railroads 1,037,000,000 

Interest on public debt 1,020,000,000 

Pensions 213,000,000 

War-risk Insurance 11 7,000,000 

Purchase Federal farm-loan bonds 30,000,000 

$5,716,000,000 
During the second session of the sixty-sixth Congress total 
appropriations and authorizations reached $5,874,438,788. 

An offset of an uncertain amount may be considered in war 
loans due this Government from various European Governments 
under the several acts of Congress beginning April 24, 1917, 
and ending July 9, 1918, for a total authorization of 



TAXATION 173 

$10,000,000,000. Credits to an amount of $9,710,525,310 have 
been given and cash advanced by our Government of 
$9,580,823,677. 

All interest payments on the above have been extended since 
the war at the request of the different Governments that are 
seeking to become rehabilitated. Another uncertain element of 
lower tax levy comes from a reduction in running expenses of 
the Government due to greater economy. We have then to con- 
sider probably appropriations by Congress based on the 1920 
record of between $3,000,000,000 and $4,000,000,000 and payment 
of so much of the floating debt as can be cared for in addition 
to an annual interest and sinking fund charge of $1,250,000,000 
as stated. That is our problem. 

In the Secretary of the Treasury's Report, 1920 (p. 779), ap- 
pears receipts for 1920 fiscal year as follows : 

Customs, $323,536,559; income and excess profits, $3>957, 701,342; mis- 
cellaneous internal revenue, $1,441,447,870; other miscellaneous items and 
sales of public lands making total receipts for 1920 of $6,695,374,766. 

It is conceded that these receipts will materially fall off in 
the future because of reduced excess profits and smaller in- 
dividual incomes. In a letter from the Commissioner of In- 
ternal Revenue dated November 20, 1920, he says the actuary 
estimated Treasury receipts as follows : 
1919: 

Individual taxes ' $901,000,000 

Corporation taxes 400,000,000 

War and excess profits 1,300,000,000 

$2,601,000,000 

1920: 

Individual taxes 1,400,000,000 

Corporation taxes 650,000,000 

War and excess profits 1,700,000,000 

$3,750,000,000 

It is now proposed in some quarters to repeal the excess 
profits tax and reduce the surtaxes on individual incomes so 
that a large part of the above income will be lost. Even the 
Secretary of the Treasury advises a repeal of the excess profits 
tax, although he asks that it be replaced by some other form of 
corporation tax. 

Constant assaults on the excess profits tax law from all direc- 
tions indicate it is a friendless waif, not popular with those 
whose profits it has heretofore divided for the support of 



174 SELECTED ARTICLES 

Government and it also seems probable, judging from opposition 
expressed against any new form of tax that no substitute will 
meet with general approval. One tax is insistently urged upon 
Congress in case the excess profits tax law is repealed. It is 
known as a consumption turnover sales tax and was vigorously 
pressed on the Ways and Means Committee last session in an 
effort to make it part of the revenue plan that was to provide 
for financing the soldiers' bonus bill, which bill finally passed 
the House. 

What Is a Turnover Consumption Tax? 

It is a reminder of the small boy's description of a toothache, 
"an abomination in the eyes of the Lord that does no man good." 
However, a consumption turnover tax will do everybody — good 
and plenty. It is a tax levied on every pound of sugar, salt, and 
starch that goes into family use from the growing of the sugar 
beets to its purchase at the store, on every pound of flour and 
other food, on every pound of meat from the farm to the packer 
and back again, on every pound of tea or coal, on every gar- 
ment from the hat down to shoes and stockings, or, like an 
old-time description of a tariff bill, it is a tax from the cradle 
to the coffin. Every sale of wood from the owner to the logger, 
to the mill man, to the cradle or coffin factory, to the wholesaler, 
to the retailer, and finally to the customer pays the tax on every 
turnover with several times added for good measure, until the 
actual cost and actual tax join in a free-for-all price raising for 
the one hundred five million consumers who will pay an equal 
share of the increase. The wealthiest and poorest will pay the 
same tax, because a turnover sales tax plays no favorites from 
Vanderbilt to the humblest beggar when both must eat or starve. 

During 1918, one person in this country paid on an annual 
income of over $5,000,000, two on between $4,000,000 and 
$5,000,000, eleven on between $2,000,000 and $3,000,000, forty-nine 
on between $1,000,000 and $2,000,000, and one hundred seventy- 
nine others on incomes between $500,000 and $1,000,000. Under a 
turnover tax these people would turn over the same amount 
of tax for the same food, drink, and wear as the poorest in the 
land. Fraud in omitting to report sales, which will be general, 
would penalize only the consumer. Administration by the 
Government would become a hopeless task, judging from past 
experience when every seller levies the tax with a generous 
margin on the goods sold whether the tax is reported or not. 



TAXATION 175 

It is neither a just, equitable, nor enforceable tax, and I desire 
to present proof of these charges against the criminal at the 
bar — a turnover consumption tax. 

Report of the Special Committee on Taxation of the Chamber 
of Commerce of the United States 

It would seem that no careful legislator will be deluded by 
the arguments of a handful of financially interested advocates 
of a turnover sales tax, and the objections already presented 
are unanswerable ; but another organization, the Chamber of 
Commerce of the United States, has aimed to give the same 
service to Congress on the same vitally important tax problem, 
and through its committee of nine tax authorities has also an- 
nounced its findings on a turnover sales tax. The report of its 
committee against this tax is unanimous. I quote at some 
length because of the recognized high standing of this country- 
wide commercial organization : 

A Consumption Tax — Difficulty of Administration 

Various arguments have been brought forward in support of a sales 
tax, but in the opinion of the committee these arguments are overcome 
by important objections to any attempt to use such a source for Federal 
revenues. In the first place, the application of any of these taxes and 
its successful administration would not be so simple as is often sup- 
posed. In declining markets and under conditions of close competition 
turnover taxes would frequently have to be borne by the seller, and in 
many instances might for him be an added cause of loss. Even if 
passed on through addition to the price paid by the buyer, it would 
almost inevitably be pyramided, causing material increases in many prices 
paid by consumers. 

Ruinous Effect of Price Pyramiding 

There are still more fundamental considerations weighing against such 
a tax. One of the objections to the excess profits tax would apply with 
added force; this is uncertainty in yield of revenue, for gross sales 
fluctuate more widely than net income. If any form of turnover tax -were 
imposed, it would result in advantages for large industrial undertakings 
which begin their processes with raw materials and carrv them through 
to the finished product; such "integrated" industries would be subject to 
the tax but once, whereas their smaller competitors, acquiring materials 
from independent sources, would have the tax in their prices several 
times and probably increased in effect through pyramiding. Finished 
articles imported from abroad would have a similar advantage over domes- 
tic manufactures. 

Repudiates Principle of Taxing According to Ability to Pay 

Perhaps the greatest inequity, however, would appear in the propor- 
tionate results of any of the taxes here under consideration upon the 
person with small income as compared with the person of large income. 
At the bottom of the economic scale are persons whose income barely 
suffices to provide them with necessities of the poorest quality and in 
the smallest amount, and at the other end of the scale are persons whose 
expenditures for necessities, no matter how large, represent but a fraction 
of their income. Any tax falling upon general expenditures is conse- 



176 SELECTED ARTICLES 

quently disproportionately heavier for persons of smaller incomes as com- 
pared with persons of larger incomes. To the extent sales taxes of the 
sorts that have been suggested were used as a general source of revenue 
there would be a departure from the principle that taxes should be levied 
in accordance with ability to pay. 

Of Doubtful Legality 

Finally, there would seem to be legal difficulties in the way of a 
general sales tax. Opinions handed down by the Supreme Court in 
March and June of this year make it clear that such a tax is not au- 
thorized by the income-tax amendment to the Constitution. Whether or 
not it would be held by the courts to be an indirect tax is uncertain; if 
it were held to be a direct tax, it would under the Constitution, have 
to be apportioned among the States in accordance with their population, 
an obviously impracticable procedure. Reliance for revenues in large 
amount should not in any event be placed upon a tax regarding the 
legality of which there is doubt. 

It must be kept in mind that these business interests are 
acting for their own protection because of the uncertain char- 
acter of a turnover consumption tax. When it does not shift 
it threatens the industry compelled to pay it and when it shifts 
to the consumer, he is unjustly compelled to pay a tax now paid 
out of corporations' excess profits. 

The authorities quoted will carry weight to most minds of 
the absolute danger attending a turnover consumption tax. 

Experts Who Can Best Testify 

Another list of authorities can be quoted whose names are 
legion. They consist of the farmers, clerks, skilled and common 
labor, housewives, and others not enumerated, who are glad to 
earn enough to get food and clothes and to give their children 
a common school education. They are the ones who will be 
called upon to pay 90 per cent and over of the proposed con- 
sumption taxes now paid by corporation excess profits and high 
supertaxes on personal incomes. 

Any advocate of average intelligence, can safely take his case 
to this class of experts, and secure a verdict against a turn- 
over consumption tax nine times out of ten, either in a judicial, 
legislative, or political forum, and the tax if passed, will be 
tried out, without doubt, by the last-named court and the one 
of last resort — the people at the first opportunity given to 
register their disapproval at the polls. 

Whom Does Congress Consult in Revenue Legislation? 

Presumably no more reliable adviser for Congress on reve- 
nues exists than the Secretary of the Treasury whose duty it is 
to properly and economically collect revenues and carry on the 
fiscal policy of the Government. He has for his advisers Gov- 



TAXATION 177 

eminent tax experts and men of nation-wide reputation without 
private or personal ends to protect or advance. He is con- 
cerned in both revenue to be obtained and method of adminis- 
tration. In his 1920 annual report Secretary Houston condemns 
a proposed sales tax, as follows (p. 28) : 

In the Treasurer's opinion there are many grave objections to a sales 
tax. Further consideration of the subject has convinced me that a gen- 
eral sales or turnover tax is altogether inexpedient. It would apply 
not only to the necessities of life — the food and clothing of the very 
poor — but it would similarly raise the prices of the materials and equip- 
ment used in agriculture and manufactures. It would confer in effect, 
a substantial bounty upon large corporate combinations and place at cor- 
responding disadvantage the smaller or disassociated industries which carry 
on separately the business operations that in many combinations and trusts 
are united under one ownership. The group of independent producers 
would pay several taxes, the combinations would pay only one tax. Finally, 
it would add a heavy administrative load to the Bureau of Internal Rev- 
enue which ... is already near the limit of its capacity. Simplication 
of the tax laws and restriction rather than extension of its scope are as 
important from the standpoint of successful administration as from that 
of the taxpayers' interests. 

Administration of a General Sales Tax 

Mr. Adams, a Treasury income tax expert, says on this point 
in the Ways and Means Committee hearings : 

If you have the income tax with all the necessary difficulties and you 
have the corporation tax with all its necessary difficulties and you have 
the principal present consumption taxes it is going to be a dangerous 
thing from an administrative standpoint to add a general sales tax which 
will bring in possibly a million new taxpayers to take care of, together 
with all the added complications of a new and nation-wide tax. . . (p. 28.) 

His replies to questions of administration are illuminating: 

Mr. Frear. How many employees does the Treasury Department have 
engaged in this particular work (collecting taxes) ? 

Dr. Adams. I shall have to ask you to let me put that figure in the 
record (these figures, p. 36, show 18,440 employees). 

Mr. Frear. What would be the number of employees required in ad- 
dition to cover the final sales tax in checking up? 

Dr. Adams. That depends entirely upon the accuracy with which these 
reports were checked. You can simply put a sales tax on the statute 
books and leave it to enforce itself and it doesn't require very much 
force to handle it. 

Mr. Frear. But you spoke yesterday of the different forms and that 
is my reason for going back to it. 

Dr. Adams. And that ought not to be done. We are experiencing a 
perfectly enormous amount of evasion with respect to some sales taxes, 
such as are imposed by section 630, the soda fountain drinks and taxes 
of that kind, because we haven't got an adequate force to check them 
up and supervise them. 

A 100 Per Cent Increased Price for Soft Drinks 

It is certain that a 1 per cent turnover sales tax would be 
pyramided so that in a half dozen or ten turnovers the padded 
price in each turnover sale would make a ballooning of prices as 
wild in character and as burdensome in effect as were war-time 
prices. Two or three illustrations are readily available. 



178 SELECTED ARTICLES 

During a hearing before the Ways and Means Committee De- 
cember 21, Senator Hardwick, now governor of Georgia, was dis- 
cussing the effect of a luxury tax on soft drinks when the follow- 
ing facts were developed: 

Mr. Hardwick. Bottled goods that have a standard and uniform price 
throughout the country of 5c. were immediately increased to the consumer 
(after levying of a 1 per cent luxury tax or Yoc. tax on 5c. sale) until 
the article that formerly sold at 5c. cost the consumer 7 to 10c. . . 

Mr. Frear. Wouldn't that apply, Senator, to the sales tax ordinarily; 
that is, without relation to the exact tax which the seller will be obliged 
to pay? He will place upon goods a price that will make even change. 

Mr. Hardwick. I have no doubt in my own mind, speaking person- 
ally, that that is true, and I understand that the gentleman who pre- 
sented the matter to your committee yesterday admitted that when that 
is passed on, ultimately, it always gains a little, like the snowball going 
downhill in wintertime. . . (p. 135.) 

Mr. Frear. You say that these soft drinks were formerly sold for 5c? 

Mr. Hardwick. Yes, sir. 

Mr. Frear. Then what tax was added by Congress? 

Mr. Hardwick. 10 per cent. 

Mr. Frear. Then the same soft drinks were sold for 10c. ? 

Mr. Hardwick. They were sold at from 6 and 7 to 10c. 

Mr. Frear. In that case they added ten times the tax, did they not, 
if sold for ioc? 

Mr. Hardwick. Undoubtedly. 

This increase of 100 per cent in price or 950 per cent tax 
increase is submitted as a fair example of the workings of a 
sales tax, with increased price added for every turnover. 

How It Works Now With Cigars, 400 Per Cent Tax Increase 

Equally to the point and almost as greatly padded is the pro- 
posed price of a cigar from 8c. to 9c, because of a suggested 
increase in duty of $2 a thousand, or }i of ic. for each cigar. 
The following from the hearings of January 21 before the Ways 
and Means Committee illustrates the same evil : 

Mr. Longworth. How much would you add to cover that 1/5 of ic. 
($2 a thousand additional duty) ? 

Mr. Krauss. We have no medium of exchange for selling goods at 
fifths of cents. 

Mr. Longworth. How much would it add per cigar? As a matter of 
fact, you would add 2c, would you not, or would you add ic? How 
much would that add to the retail price? It would probably add ic. so 
that there would be a profit of 4/5 of ic. to the cigar? 

Mr. Krauss. Not to the manufacturer; probably to the dealer. 

Mr. Longworth. If the duty was added, that would be 1/5 of ic. for 
each cigar. According to you that would add ic. to the selling price to 
the consumer, or make a net additional profit of 4/5 of ic. ? 

Mr. Krauss. Yes; provided you have those units to work with. 

Mr. Longworth. . . And you say that would add 2c. to the cost of a 
cigar ? 

Mr. Krauss. I did not say 2c, I said probably ic, because there is 
not any intermediate method of exchange (p. 1363). 

Mr. Chairman, that principle could be and undoubtedly would 
be applied to every turnover sales tax where the amount of tax 
was too small to have any other "intermediate method of ex- 
change." 



TAXATION 179 

It must be remembered that the soft-drink and cigar tax was 
not levied until the sale was made by the wholesaler or retailer 
to the customer, and these sales did not involve more than 
two turnovers with only one tax, whereas the proposed turnover 
sales tax sought to be enacted into law would mean a tax levied 
and collected on from eight to ten turnovers in some instances 
as have been heretofore disclosed. 

Nothing need be added by way of argument to show how 
vicious and mischievous a turnover sales tax is certain to be 
when nothing prevents the cupidity of the seller, on the one 
hand, from taking advantage of the necessity or ignorance of 
the consumer, on the other, with a well-founded possibility that 
wholesale evasions of the tax or neglect to report will ensue, as 
stated in findings of the National Industrial Conference Board's 
committee. 

Taxing and Padding From Producer to Consumer, 400 Per Cent 

Increase 

Only one further illustration will be offered. When the rail- 
way bill was before Congress last session Director General 
Hines stated that an increase of $875,000,000 in freight rates 
would mean an increase to the consumer of $4,375,000,000, or 
400 per cent increase, because, as stated by Chairman Woolley, 
of the Interstate Commerce Commission, "The shipper passes 
this along to the consumer and on back to the producer of the 
raw material, who has to stand the cost of transportation." 

The effect of increased freight rates that has served to 
prevent any reduction of ordinary commodities to pre-war prices 
from a riot of padding and ballooning of prices is also made 
possible in a sales tax under the beneficient consumption turn- 
over tax plan. 

Sales Tax Laws, Where and How Enforced Today 

Without attempting to set forth specific terms or scope of 
existing sales tax laws it is noted that : 

Canada's sales tax law of 1915 (assented to July 1, 1920) 
provides for a tax on banking and negotiable instruments. The 
tax is laid on final sales of various luxuries and on high-priced 
wearing apparel not ordinarily worn by 10 per cent of the people 
with a minimum price fixed by law above which the tax applies. 
A tax also is collected on goods sold by wholesalers and jobbers, 
but not- on plain foodstuffs. 



i8o SELECTED ARTICLES 

The French turnover tax (1920) applies to luxuries set forth 
in schedules A and B of the law as distinguished from neces- 
sities and is much like the Canadian law, in that it does not 
reach necessary foodstuffs. The French law was passed by a 
Government with less than one-third the estimated wealth of 
our own and with a national debt of $46,000,000,000, or double 
our own after crediting foreign loans. Its sales tax law, enacted 
to meet a critical national financial emergency, has been in force 
less than one year, but actual receipts have only reached about 
47 per cent of those estimated by its advocates when the law 
was passed. Due to many exemptions and presumable difficulties 
in administration, Canadian receipts from the sales tax in that 
country are in like manner disappointing. 

The Philippine, 191 7, Mexican, 1906, and German, 1920, turn- 
over taxes should each and all delight the hearts of Messrs. 
Kahn, Bache, and Rothschild, leading exponents of the tax here, 
although the gentlemen named have not found any of these coun- 
tries sufficiently attractive to renounce citizenship or residence 
in the United States because of more agreeable tax laws to be 
found elsewhere. 

The Philippine, Mexican, and German Turnover Tax 

The Philippine tax has been pointed to as a model for the 
United States. Industries in the Philippines are largely found 
in or around its one large city — Manila — and due to isolation 
of the islands the law is not difficult to administer. This turn- 
over sales tax is a relic of the old Spanish regime, and the tax 
was also laid by Spain on Mexico. It is a legacy from a Gov- 
ernment that notably failed in its cruel administration in both 
these countries, and curiously enough no law of the kind is in 
effect in Spain. I quote hereafter as to the Philippine and 
Mexican methods of administration, if to be applied here, based 
on statement of H. B. Fernald, of New York City, before the 
industrial tax board — page 66, hearings. 

It is also noteworthy that a statement from Martin R. 
Bourne, of New York, urging the Philippine sales tax on Con- 
gress, claims the same rate of tax which raises $7,000,000, or 
$1 per capita in the Philippines, will raise $2,000,000,000, or 
$20 per capita, in the United States. In view of the further 
argument that a sales tax is practically a poll tax based on 
consumption of each taxpayer, the effect of the argument is 



TAXATION 181 

clear that the American citizen will pay twenty times as much 
as the Filipino under the same kind of tax. 

Germany's turnover tax law approaches the ideal tax pic- 
tured by advocates of the system. Its name there, "umsatz- 
steuergeset," comprehends several turnovers at the outset. The 
law levies turnover taxes on sales, both wholesale and retail, 
but its exemptions thoughtfully cover a number of banking 
transactions, including exchanges of bank notes, paper money, 
and so forth, which exceptions would presumably be urged by 
"experts" for any law enacted here. 

A tax of i>4 per cent on necessaries, 15 per cent on sales 
classed as luxuries, and 10 per cent on all advertisements not 
connected with public elections in Germany contribute toward 
the $57,000,000,000 indemnity burden recently levied by Great 
Britain, France, and Belgium on a defeated foe, but why should 
Messrs. Kahn, Bache, Rothschild, or Goldsmith, its advocates 
here, collect their pound of flesh from the American laborer, 
whose needs are to be substituted for excess profits taxes just 
because that tax is yielded up in Germany through force of 
arms? 

England has repudiated any turnover tax sales law, root or 
branch. Canada and France are conducting very limited ex- 
periments with luxury taxes that are disappointing and irri- 
tating in administration and revenue. 

The only turnover sales tax laws in Governments of com- 
parative importance are found in Mexico and Germany, where 
the iron hand of revolution has turned over Governments and 
ruthlessly imposed turnover taxes as one of the chief fruits of 
revolution. 

Do we want such laws for the United States? If so, why? 

Who Is Pushing a Turnover Sales Tax? 

Let us now examine the "experts" and authorities (?) who 
are pressing a turnover sales tax on Congress. Singularly 
enough, none of the twenty members of the tax committee 
representing two of the largest commercial organizations in the 
country were called before the Ways and Means Committee to 
give us the benefit of their study and investigations, nor do 
these important reports appear anywhere in the hearings, nor 
has any reference been made to them to my knowledge. 

Practically the only witnesses who have appeared before the 



182 SELECTED ARTICLES 

Ways and Means Committee, aside from Dr. Adams, of the 
Treasury Department, are Julius Bache, a banker and broker, 
New York City; Otto Kahn, a banker and broker, New York 
City; and Meyer Rothschild, also from New York City; although 
Mr. Klein and Mr. Goldsmith, "accountants," also appear on dif- 
ferent phases of the income tax law as it affects their clients. 

The Sales Tax Versus a Head Tax 

A short expeditious tax collection has been suggested by 
other authorities, that may yet be urged by Messrs. Kahn, Bache, 
Rothschild, and Goldsmith on Congress. It is much simpler 
than the excess profits tax law, which causes these income 
authorities to spend sleepless nights in preparing tax reports. 
It will save them the necessity of investing their large incomes 
in tax-exempt securities in order to avoid the higher surtaxes. 
In fact, while it resembles a turnover sales tax, so ably defended 
by these gentlemen, in that it would reach every man, woman, 
and child through the food and clothing individually worn, yet 
it would save the objection of profiting and tax pyramiding, 
which is a conceded evil of the turnover sales tax. It also 
reaches to the very base of fundamental taxation. 

It is urged Congress could reach the same result advocated 
by Messrs. Kahn, Bache, Rothschild, and Goldsmith and at 
the same time avoid a needless pyramiding turnover tax by 
enacting a poll or head tax. By transferring the $1,000,000,000 
of excess profits and surtaxes that now worries those obliged 
to pay such taxes over to a poll or head tax the tax could not 
be avoided by the taxpayer and collection annually would then 
be as easy as taking the census. 

Messrs. Kahn and Bache might urge it be provided by law 
that the head of the house would pay a tax levy of $10 per head 
for each member of his family, based on the per capita share 
of each inhabitant who is now asked to shoulder the $1,000,000,000 
tax burden of the rich. If any tax was not promptly paid, it 
might hamper the Government to put the wage earner in jail; 
so, like the good old distress-for-debt practices in Germany 
and England, from which some of our modern sales tax author- 
ities spring, the law might seize a member of the family, say one 
of the children, who Bache says will not pay anyhow if it does 
not consume, and the wage earner would then be left free to 
earn the tax. 



TAXATION 183 

Large Taxes from Large Families a Certainty 

Take the case of Mr. Bland, a constituent of Congressman 
Small, with twenty-six children; his head tax of $10 each would 
reach $280, which would include himself and his wife. In the 
case of a constituent of my own, with seventeen living children, 
he would only have to raise $190, which would include himself 
and wife. Of course, these farmers are also paying local taxes 
on their farms for the support of their schools, local improve- 
ments, and State institutions, but they might put in a few extra 
hours daily in earning the extra tax that Messrs. Kahn, Bache, 
Rothschild, and Goldsmith would then have taken from their 
own shoulders, and thus we would avoid the need of a general 
pyramiding sales tax. 

The system suggested would possess the additional virtue of 
having direct action, and that is what these New York bankers 
are seeking. True, Bland, the farmer is probably working four- 
teen hours a day already, while Kahn, Bache, and Rothschild 
have a minimum unwritten law of nearer four hours, and there 
may be other matters of detail that would arise, but, as Mr. Kahn 
well says, "No law is absolutely perfect." However, such a 
law would solve the mental struggles of excess profits tax- 
payers and is well for them to consider as an alternative for 
the sales tax. 

Of course, Congress would take an extended leave of absence 
after passing any such measure, and probably the next Con- 
gress, of different Members, might enact an extreme capital 
tax which would get more quick profits than under the present 
excess profits tax system ; but as a temporary relief it is sub- 
mitted that the kind of a tax for these distinguished gentlemen 
to advocate is a head tax, or poll tax, although the latter term 
would have a singularly unpleasant sound to those who had 
to submit their candidacies at the polls after enacting the law. 

Prejudiced Tax Experts 

Speaking personally, I believe Messrs. Kahn, Bache, Roths- 
child, and those they represent should be made to pay every 
dollar of taxes due from them under existing laws, and they 
should pay taxes according to their ability. Any attempt to 
avoid payment of taxes by investing in tax-exempt securities 
ought to be met, so far as possible, by drastic legislation until a 
constitutional amendment can be passed. 



184 SELECTED ARTICLES 

The tax dodger of today is not the poor man whose home and 
farm is immediately sold for taxes, with stiff penalties when it 
is redeemed. He can not avoid payment of his taxes by invest- 
ment in tax-free securities or other means, and every dollar 
spent by him for taxes is ordinarily taken from some need of 
the family. 

The tax dodgers and prejudiced tax experts are not found 
among this class of people, but the man who unblushingly tells 
the Ways and Means Committee he is investing his surplus cash 
in tax-exempt bonds ; who publicly says he spends eleven months 
of the year studying how to evade our tax laws; who says 
if the poor do not want to pay a sales tax they need not 
consume; who unblushingly declares in one breath that he shifts 
all his taxes over onto the ultimate consumer, while in the next 
breath he demands a repeal of the excess profits tax, because 
it is a heavy burden on the rich; the wealthy banker who 
pompously says to the country in his six by nine pamphlet that 
only one man on the Ways and Means Committee understands 
the revenue question, and, therefore, he — Bache — must come to 
Washington in order to instruct the committee regarding the 
tax he wants — this kind of tax expert will find new apologists, 
even among his own fellows, and he is out of touch with 99 
per cent of the one hundred million people for whom he asks 
Congress to pass a sales tax law. 

Who Will Pay the Sales Tax? 

Let us for a moment study a picture of human existence and 
the proposed taxation scheme. 

Of the one hundred six million people in this country it is 
doubtful if 1 per cent are making $5,000 annually, mentioned in 
one discussion by Mr. Kahn, nor do they pay any appreciable 
income tax. Ninety-five per cent certainly are among those who 
grub along for less, and half of the total presumably are living 
on net incomes of $1,000 or less received by the family bread- 
winner. This amount has not much more than one-half the pur- 
chasing power of ten years ago. In other words, the astounding 
report that a large part of labor received $700 or less annually 
ten years ago was no more serious than conditions of today-- 
particularly when over two million breadwinners are out of em- 
ployment. Immaculately dressed Messrs. Kahn, Bache, Roths- 
child, and Goldsmith do not represent these people. 



TAXATION 185 

Those they represent who clipped bonds or interest coupons 
during the war then took no chances. Their living expenses, 
luxuries, and limousines never occasion them worry now. Yet 
they protest against turning over to the Government part of 
their "excess" profits, not of their reasonable profits but a 
part of their "excess profits." They declare that individual 
enterprise, ambition, and initiative will be hampered by parting 
with any excess profits. 

Of the one hundred million people whom Congress repre- 
sents, I believe statistics would show 90 per cent are no better 
off today financially than before the war, although the great 
demand for labor during the war is so recent that the country 
has not yet recovered from its financial orgy to take an account- 
ing of stock. That is the situation confronting the country and 
Congress when Messrs. Kahn, Bache, Rothschild, and Goldsmith 
demand that "the burden now upon the rich," to use Kahn's 
words, must be shifted to the one hundred million. In other 
words, that an income of over $1,000,000,000, counting the 
excess profits, collections, and higher surtax now paid by less 
than 5 per cent of our people, must be shifted over to the 
backs of the remaining 95 per cent by a consumption tax. Under 
that beneficent proposal every turnover tax will be paid as stated 
from the time sugar beets are first sold to the last sale of 
refined sugar by retailer; from the sale of wheat at the elevator 
to the final sale of bread or breakfast food by the grocer; from 
the sale of the steer or hog by the farmer to the sale of shoes 
by the retailer or wienerwursts by the lunch stand — and for 
every eater of porterhouse a score patronize the wienerwursts. 

Pyramiding From Producer to Consumer — Where Does the Re- 
tailer Come in? 

From five tax levies to ten tax levies are made between 
the first sale and the last of the completed article, depending 
upon the "turnovers." The tax may be insignificant but after 
witnessing the cupidity, greed, and profiteering of the past three 
years in America, the public must pay, irrespective of cost or 
reasonable profits, and no sensible man believes that the tax 
added to the article by the different middlemen from first 
producer to final consumer will be that fixed by law. If it is 
1 per cent with five turnovers it is more likely to be 25 per 
cent by the time the many turnovers occur and before the 



186 SELECTED ARTICLES 

finished article is received the turnover tax and much more, is 
pyramided each time and is added to the cost of the article on 
which the next turnover tax is levied, as had been disclosed 
by Senator Hardwick. In many cases it is fair to suppose that 
where the Government would receive a total of 5 per cent in 
taxes on the different values for that sold, the consumer will 
pay from 25 per cent to 50 per cent or even 100 per cent ad- 
ditional, 90 per cent of which additional charge will go into the 
tills of the different turnover dealers. That is one reason retail 
merchants and other dealers have no fault to find with the turn- 
over sales tax plan and are easily caught by the argument. 

That is a reason why Mr. Lew Hahn, managing director of 
the National Retail Dry Goods Association, is said to be in con- 
ference with "members of the Senate Finance Committee and 
of the Ways and Means Committee of the House" (Washing- 
ton Times, January 25). 

These retailers do not pay the sales tax which Mr. Hahn and 
Mr. Kahn and Mr. Bache and Mr. Rothschild and Mr. Gold- 
smith favor. The retailers are the ones who will pyramid prices 
and collect from the consumers large margins even as they try 
to do today. 

Notwithstanding manufacturers and wholesalers have slashed 
prices to retailers according to published statements, the large 
retailer still charges his heavy profit without yet having learned 
that the war ended more than two years ago. The retailer has 
nothing to fear from the turnover sales tax because he does not 
pay it — he passes it on to the consumer and his advocacy of 
the sales tax is entitled to close scrutiny particularly if he is 
now seeking to escape paying an excess profits tax through the 
shift. 

Everybody to Pay the Same Tax 

A sales tax hits the ultimate consumer who generally pays 
the final bill, including freight bills, taxes, and every charge 
that goes to make up the last selling price. All people will pay 
the same and thereby can learn the blessings of taxpaying in 
real earnest. The molder in the foundry will pay the same as 
Otto Kahn, banker, for his sugar, with the same profits and 
tax added in both cases; the miner digging coal will pay the 
same as Jules Bache, New York banker, for the meat, flour, 



TAXATION 187 

and potatoes with the same tax added; the farmer will pay 
the same as Rothschild and Goldsmith for the same grade of 
shoes, shirts, or clothes, with the same tax added although neither 
Kahn nor Bache nor Rothschild will draw heavily on the kind 
of goods the farmer or laborer wears. The workman with his 
flivver will pay the same tax on his gasoline that Rockefeller 
himself pays, in order to pile up excess profits for Standard Oil 
that are no longer to be taxed according to Messrs. Bache, Kahn, 
Goldsmith, and Rothschild. 

The farmer will pay the new price for his axe and other tools 
that Carnegie exacts through the Steel Trust, and the excess 
profits tax formerly paid by the trust is now to be shifted to the 
final purchaser — in order not to destroy initiative in business. 
The soldiers whom we sent to war to protect the property of 
Kahn, Bache et al. from German tribute — these men who saved 
the day — will now pay the same turnover tax as Kahn et al. 
This is the beneficent scheme known as a consumption tax, or 
a turnover sales tax, that these bankers and financiers ask Con- 
gress to place on the backs of the one hundred million people 
whom we represent. 

Inflation and Deflation Laid to Taxes 

In a hope of escaping excess profits taxes the proponents of 
the repeal paint in somber colors the terrible distress of busi- 
ness occasioned by the excess profits tax and the beautiful 
picture of every man bearing his own share of the burden 
under a consumption sales tax. 

Every business reverse, every annoyance, is laid to the excess 
profits tax. When prices were high Kahn et al. claimed prices 
were high because the excess profits were always added. When 
the balloon burst and prices dropped Kahn et al. pointed to 
the drop as a business distress caused by the drain of an excess 
profits tax. Notwithstanding the tax only reaches a part of the 
excess profits over reasonable profits of 8 per cent, the tax is 
protested by many men who pay it in the same breath that they 
confidently declare they pass the tax on to the other fellow. 

One ounce of fact is worth a ton of theory, and a few un- 
prejudiced witnesses are worth all the Kahns, Baches, Roths- 
childs, and Goldsmiths in the universe who are special pleaders 
for special interests. 



i88 SELECTED ARTICLES 

As heretofore stated, several hundred witnesses appeared be- 
fore the Ways and Means Committee on tariff schedules. They 
employ hundreds of thousands of men in the aggregate and have 
paid many millions of dollars in excess profits taxes on their 
factory earnings in the aggregate, yet not one of these men 
complained of the excess profits law as a hindrance to his 
business nor as a bar to incentive. Search the hearings of these 
hundreds of witnesses and not one seconds the demand of 
Messrs. Otto Kahn, Jules Bache, Rothschild and Goldsmith, 
bankers, brokers, and special pleaders. What more significant 
illustration of the difference in attitude between the coupon- 
clipping and stock-market juggling business compared to actual 
producers, employers of labor, and contributors to the country's 
prosperity. It is the difference between the broker and the 
producer, whether he be farmer, factory hand, or manufacturer. 

Real Tax Authorities versus "Wobblers and Waverers" 

Thus far I have presented to you the findings of two impor- 
tant tax committees, representing thousands of manufacturers 
and hundreds of chambers of commerce throughout the country. 
These findings in both cases specifically repudiate a consump- 
tion tax and point out dangers which would not occur to novices 
or superficial students of the subject. I have also quoted from 
the Secretary of the Treasury's report specifically rejecting a 
consumption tax both in principle and as an administrative 
proposition. 

Quotations have also been furnished showing conclusively 
that taxes are loaded and this heavy load in addition to the 
tax will be passed on to the consumer under a turnover consump- 
tion tax. 

These high authorities are opposed by several New York 
bankers, brokers, and accountants, one of whom, Mr. Kahn, has 
"wabbled and wavered" for many months and has not yet 
found his equilibrium. Mr. Bache goes Mr. Kahn one better, as 
I have shown, and says all income taxes and all corporation 
taxes should be wiped out and a turnover consumption tax sub- 
stituted. He adds that he is placing his own funds in tax- 
exempt securities as rapidly as possible. Mr. Rothschild be- 
lieves like Mr. Bache, but does not advocate going the limit at 
this time. These three experts were before the National 



TAXATION 189 

Industrial Board tax committee and their untested theories were 
there rejected. However, they are persistent; they have mil- 
lions of dollars in annual taxes at stake among those they rep- 
resent; they have a vigorous, expensive propaganda and are 
well organized. 

They were practically the only witnesses, by a curious circum- 
stance, on the subject before the Ways and Means Committee, 
except Dr. Adams, who opposes a turnover tax, and Bache in- 
forms the country in this pamphlet that he has grapevine intelli- 
gence that Adams does not count with the Ways and Means 
Committee when it comes to preparing a bill. These are the 
financially interested witnesses who are seeking to have Con- 
gress relieve them of their taxes and to saddle their tax burdens 
on the general public. 

They point to Canada, Philippines, and France to prove that 
a turnover sales tax is desirable for the United States. At the 
risk of appearing to give undue weight to their arguments, I 
will quote from the opinions of men who have given the tax sub- 
ject here and abroad profound and exhaustive study. If the 
conclusions of the tax committee, already quoted, were convinc- 
ing, the reasons advanced by the following witnesses are con- 
clusive : 

Testimony of Tax Experts Against a Sales Tax 

Arthur A. Ballantine, attorney at law, New York City, for- 
merly Solicitor of Internal Revenue, says, page 32, hearings 
National Industrial tax committee : 

I believe that this idea of a sales tax, a tax collected everywhere, 
falling on no one, is a will-o'-the-wisp which has floated over this field 
of taxation and which is in danger of luring business men who approach 
Congress in an effort to get really beneficial changes into futile action 
instead of constructive action. 

I believe that this committee, by the very careful and exhaustive con- 
sideration which it has given to the advocates of this plan and its careful 
thought as to conclusions, has done much to dissipate this myth and to 
direct the efforts of business men into practical channels instead of down 
a pathway which leads to futility. 

For the second witness I quote from Charles A. Andrews, 
whose frank, clear analysis of the sales tax is illuminating. 
He says (p. 38) : 

There was on the committee no vociferous objector to the sales tax. 
There was on the committee nobody who was loaded to kill it. We 
started in upon the assumption that we were going to work out something 
in the form of a sales tax. We invited various well-informed people to 
come before us. We reached out and got printed matter and manuscripts; 



igo SELECTED ARTICLES 

we made investigations; and slowly but steadily the committee was driven 
to the inevitable conclusion that it, representing a large body of business 
men, could not bring before this conference a recommendation for any 
form of sales tax, except as the same related to a few specific articles, 
suggestions as to which we have made, and which have been referred to 
by Mr. Armitage. 

We haven't the nerve, as good citizens of the country — which we 
believe we are, and are trying to be — to say to a body of business men 
in this country, who are suggesting that business be relieved from a 
billion dollars of excess profits tax, that we propose a tax which will 
cause the billion to be paid by the ultimate consumer. That is such a 
violent divergence from the principle of payment upon the basis of ability 
to pay that we can not ask this body of business men to get behind that 
sort of a tax. 

We do not believe, in this day and generation — and following the 
World War, instead of following the Napoleonic wars — that we have any 
business to propose seriously to the Congress of the United States a tax 
of a billion dollars, or two, or three (I don't know how much it would 
produce — all those figures are given), to be paid by the ultimate consumer, 
and organized business excused from its $1,000,000,000 of excess profits 
tax. 

We don't think that is good citizenship; and we don't think that is 
good economics. That is the real reason that we disposed of or rejected 
the sales tax, upon the assumption that the tax is paid by the ultimate 
consumer. 

Well, let us assume that the tax all remained with the original payer 
of it, and that it is not passed on to the consumer. Does it then become 
a tax which we can justify ourselves in recommending to Congress? Your 
committee says "No." . . . "Why? If the tax remains with the individual 
or concern which originally pays it, and he is not able to pass it on, it 
becomes a tax measured in terms, although not so stated, of his gross 
receipts; and as such, in the opinion of your committee, it is open to 
such serious objections that we can not ask Congress to pass it. . . A tax 
on gross receipts which leaves out of the equation all the difference in 
cost of the conduct of your business as compared to mine — perhaps it 
takes 90 per cent of my gross receipts to conduct my business and pay my 
expenses; perhaps it takes 50 per cent, or 70 per cent, or 95 per cent 
of yours — is an unjustifiable tax. . . The establishment of a tax like that 
would, in the opinion of your committee, produce such inequalities that 
our dissatisfaction with the excess profits tax would be as nothing, and 
we would find ourselves in the face of inequalities vastly greater than 
heretofore. . . It is uneconomic in its nature; it is indefensible in our opin- 
ion, in the twentieth century, if it is a general tax on all consumptions; 
and for other reasons it is equally indefensible if it becomes a tax in 
terms of gross receipts, which term means nothing so far as it relates 
to the ability to pay taxes. 

Bache Shows How to Avoid a Consumption Tax 

Mr. Jules Bache, called as a hostile witness before that com- 
mittee, gives his own concept of human nature and a cold- 
blooded alternative for the ultimate consumer who can not pay 
the tax. He says, "Quit consuming." I quote from his state- 
ment before the industrial committee (p. 58) : 

Professor Adams this morning showed the greatest optimism that I have 
ever heard voiced from the tribune. He states that he believed the tax- 
payer was a cheerful, voluntary honest man. That is not my opinion. 
The taxpayer — and I am not attacking his honesty when I say so — spends 
eleven months a year devising schemes by which, during the first month 
that he tries to make up his tax statement he can avoid as many of the 
taxes as is legally possible, and he generally succeeds in avoiding many 
of them. 

The idea of putting a thrift tax into our taxes, which the 20 per cent 



TAXATION 191 

limitation would be, is an excellent one, but the greatest thrift tax would 
be the turnover tax, since if anybody didn't want to pay any taxes he 
could merely refrain from consuming. 

The Canadian Tax Is Not a Sales Tax 

W. C. Cornwell, an employee of Mr. Bache, read a statement 
of the Canadian sales tax at that same meeting (page 60) to 
which Robert G. Wilson, chief of the tax division, American 
Mining Congress, immediately replied as follows: 

I don't know how many gentlemen present are familiar with the 
Canadian law, but it has been my fortune within the last three or four 
years to spend some time in Canada, and, for business reasons, make 
some intensive study of the Canadian law. To my mind the Canadian 
law is not a sales tax. 

In the first place, the law of July 1, known in the United States as a 
sales tax, is an amendment to the special war revenue act of 19 15, which 
is an excise tax law. 

What Mr. Cornwell has had to say regarding the premier's statement 
is true. The statement, however, is misleading in that it refers to a 
sales tax which, in its effect, exempts all the prime essentials of life 
from such taxes; it is only an addition at the rate of 1 per cent and 2 
per cent to excise taxes — luxury taxes, if you please — which rise some- 
times 50 per cent upon many commodities — luxuries, essentials, and non- 
essentials. It is not, as the business men's tax committee has termed the 
proposition, a sales tax. 

The next witness, Mr. J. F. Zoller, tax attorney of the Gen- 
eral Electric Co., says at the same committee hearings, page 62: 

I want to talk just a minute on the sales tax. Now, we have reached 
the parting of the ways here in regard to the sales tax. Personally, I am 
opposed to it for the reasons stated by Mr. Andrews. I can't state those 
objections any better or as well as he did. But the situation as I see 
it is this: The people who are favoring the sales tax are those who are 
already required to pay a sales tax under section 900 of the present law, 
and their position is that if the Government can select this industry and 
impose a sales tax upon us, why not spread it to other taxpayers? 

The Philippine Tax Discussed 

Replying to a statement filed by a Mr. Hord, formerly col- 
lector of internal revenue of the Philippines, the next tax au- 
thority, Mr. H. B. Fernald, of Loomis, Suffern & Fernald, New 
York, says, page 66: 

The sales tax has been spoken of as if it were a new thing of very 
recent years. From my experience with the sales tax I go back to two 
things — one is the matter of the Philippine tax, the other the matter of 
the Mexican tax. . . Do you want to place in your business a proposition 
where every purchaser is to get a receipt on which you are to affix serially 
numbered stamps and where you have to account for all your stamps pur- 
chased and issued, subject to examination from time to time, to check 
up as to the number you have left and when you purchase them, and 
where you have to put down the last serial number you purchased and 
the serial number you are acquiring now? 

My objection to the sales tax is particularly from this standpoint, and 
it is the same thing which will apply to almost any tax, namely, when a 
tax gets large in amount and it becomes worth while the taxpayer will 
look for a means to avoid it. . . It can be eliminated; it can be gotten 
around. The experience in Mexico has shown that conclusively, and there- 
fore it is a tax which will be paid by the small man, while the large man, 
who is able to change his business organization, can avoid it. 



io2 SELECTED ARTICLES 

Why England Rejects a Sales Tax 

The next witness is James J. Forstall, of Chicago, attorney 
at law and member of the tax committee, who speaks of efforts 
to pass a sales tax in Great Britain, the former home of Mr. 
Kahn. He says (p. 67) : 

Comment has been made on Canada and Mexico. I would like to say 
that two weeks ago yesterday, through the courtesy of Professor Haig, I 
had an opportunity to discuss with one of the members of the British in- 
come tax commission and with one of the high tax officials of the British 
Government the question of the British taxation situation. As you prob- 
ably all know, they have about as little love for the excess profits duty 
as the Americans have for the excess profits tax, and have been spending 
two years in trying to find a substitute, but they haven't yet found it. 
I asked each of those gentlemen whether the general sales tax has been 
considered as a substitute, and they both said the same thing: That it 
had been taken up and considered very seriously, but that now they were 
no longer considering it, because they were convinced that it was neither 
an equitable tax nor feasible from an administrative standpoint, nor one 
which could possibly be passed through Parliament. 

The Cumbersome Mexican Sales Tax Law 

For the next witness I quote from A. E. Holcombe, New 
York, secretary and treasurer of the National Tax Association. 
He says: 

I happen to have with me a copy of a bulletin which is just about 
to come out, and in view of the references to other countries I thought 
I might read a couple of sentences from the report on the Mexican sit- 
uation. It seems that early in the Carranza regime he established a com- 
mittee to look into the entire financial system in Mexico. That committee 
made an elaborate report, and it has been reviewed by Professor Chandler, 
of Columbia, who spent some time himself as adviser. 

It is perhaps not too much to say that the most important proposal 
to be found in the entire model plan (and that was the name given to 
this report) is that recommending the suppression of the sales tax through- 
out the States of Mexico. . . It has always been a costly tax to collect, 
and according to the opinion of Mexican officials, who are in a position 
to know, it has constituted one of the most cumbersome impediments to 
industry and commerce. 

How Farmers Regard a Sales Tax 

The next witness, J. R. Howard, of Chicago, speaks for a 
million and a half farmers in the American Farm Bureau Fed- 
eration. He speaks the sentiments of several million other farm- 
ers not connected with the organization, of which he is presi- 
dent. He says (p. 68) : 

The farmer is interested in paying his just and fair proportion of 
taxation. He believes every man, every citizen, should pay some tax, 
because it makes him a better citizen, but he believes that that taxation 
should be so distributed as to be fair and equitable, and in proportion 
to each man's ability to pay. 

With regard to the sales tax, let me say that the farmer occupies a 
unique position. I think it has generally been conceded in this discus- 
sion that the tax is passed down to the ultimate consumer. The farmer 
can pass nothing to the ultimate consumer, because he buys at the other 
man's price and sells at the other man's price, and being at that 



TAXATION 193 

disadvantage and not able to pass it on, he bears on unjust burden and is 
in a place where I am sure he, as a farmer, will object to the broad 
extension of the sales tax principle. 

Mr. H. C. McKenzie, of Walton, N. Y., a member of the tax 
committee, seconded Mr. Howard's testimony in vigorous lan- 
guage, as follows: 

I want to take the opportunity to emphasize the farmer's objections 
to a general sales tax, which have been voiced by our president, Mr. 
Howard, and to call your attention to just two or three things briefly. . . 
The chief proponent of the sales tax has told you that the excess profits 
tax is not only paid by the ultimate consumer, but that the ultimate con- 
sumer pays the tax two or three times in amount. Now, if that is right, 
the corporations and people who are doing this business are receiving a 
benefit from the excess profits tax, and the corporations and business people 
are the people who are asking for its repeal; they are asking for something 
that is diametrically opposed to their own interests. According to the 
chief proponents of the sales tax, the sales tax is paid by the ultimate 
consumer in its entirety; that is his proposition, as I understand it. 

Now, your proposition, as developed by the advocates of the sales tax, 
is this: To take an approximate $1,000,000,000 off the excess profits tax, 
which is now paid, as I contend, largely by the corporations, and put it 
over, according to the proponents of the sales tax, on the ultimate con- 
sumer. It seems to me that nothing could be more shortsighted and tend 
in the end to be a boomerang, and to be a disadvantage not only to busi- 
ness but to capital than to strive to shift the burden of a billion dollars 
from the business people who now pay it to the living wage — which is 
what it amounts to — the ultimate consumer. Ninety per cent or 95 per cent 
of that tax will be paid out of the living wage, if the contention of the 
proponents of the sales tax is correct; and I want to say that the farmers 
who are represented in the American Farm Bureau Federation will never 
in the world stand for that proposition. 

"Farmers Will Fight to the End" 

Let me interject a witness at this point whose tenderness for 
wealth and capital has no conspicuous place in his published 
statement, from which I quote. I offer an extract from an 
article given to the press a few days ago by George P. Hamp- 
ton, managing director of the Farmers National Council, an 
organization representing an enormous constituency. No one 
will doubt that equally forceful demands are voiced by the mil- 
lions of organized and unorganized labor who are to be placed 
in the new class of turnover sales taxpayers. Mr. Hampton 
says: 

In 19 18 [Mr. Hampton states] 22,696 millionaires were estimated by 
the eminent publicist, Mr. Richard Spillane, to own 27.2 per cent of the 
national wealth, or over $68,000,000,000, while the thirty-three richest 
Americans owned property worth about $4,837,000,000, or, roughly, 2 per 
cent of the national wealth. In 1918 the national wealth was estimated to 
be $250,000,000,000. It is now estimated to be $500,000,000,000. Our 
twenty-three thousand millionaires are probably worth now about $136,000,- 
000,000, and the thirty-three richest Americans about $9,675,000,000. 

If we estimate the net return on this property at only 5 per cent, the 
average income of these twenty-three thousand millionaires is nearlj 
$300,000. Of course many of them have invested largely in tax-exempt 
bonds and own a considerable proportion of the $40,000,000,000 of such 
tax-exempt bonds. While a constitutional amendment would enable the 



194 SELECTED ARTICLES 

Government to tax the income of these individuals, it will take some time 
to adopt such an amendment. A direct tax, however, could be levied 
upon capital values, and should be promptly levied by Congress instead of 
seeking some method of placing additional burdens of taxation through 
a retail sales tax, a general sales tax, and other consumption taxes upon 
the hundreds of thousands of families who today are receiving several 
hundreds of dollars less than they need to maintain the American standard 
of living. . . ■ A retail sales tax and other sales taxes and all similar taxes 
on food, clothing, and shelter, called consumption taxes, must be paid 
chiefly by the workers on the farms, in factories, mines, and transportation, 
millions of whom are getting less than the minimum wage necessary to 
maintain a family on a decent American standard. 

Mr. Hampton concludes : 

The full money cost of the war must be paid by taxes on incomes, 
corporation profits, estates, and privileges. Such taxes will yield $7,000,000,- 
000 to $8,000,000,000 a year for many years without imposing any hard- 
ship upon anyone. American farmers, who this year have lost billions 
through the slump in farm prices, will fight to the end the plan for the 
selfish privileged interests to saddle the huge war debt upon our people 
for years, and insist upon prompt payment of that debt by those who 
profited so hugely by the war and by the monopolies built, up in this 
country before and during the war. 

A Recognised Great Tax Authority on the Sales Tax 

I could quote from many other witnesses who have not 
"wabbled and wavered" for months, but the witnesses I have 
cited against the sales tax are tax students and authorities, 
men who have given the question thorough consideration in most 
cases, are apparently unprejudiced, and whose views are of 
great value in determining matters of taxation. One of the 
greatest international tax authorities, whose textbooks are 
known to every student of taxation, has expressed himself on 
the subject of a turnover sales tax as late as October 22 last. 
His contribution on the sales tax here and abroad is concise, 
fair, and positive. I quote from the statement of Dr. E. R. A. 
Seligman, of Columbia University (National Industrial Tax Com- 
mittee hearings, p. 72) : 

The sales tax is not a novel tax, as the Premier of Canada said. If 
he has followed an academic course in taxation he could have learned 
of many examples, dating back as far as thousands of years ago. The 
Romans had it, not to speak of the Egyptians and the Babylonians. I 
do not want to give a lecture on taxation; I am simply trying to call 
attention to the fact that the sales tax has existed in one form or another 
for a great many years. With only two exceptions, it has been abolished 
everywhere and has not been reintroduced in any first-class country, and 
those two exceptions are Germany, which reintroduced it in 19 19, and 
France, which, as has been said, introduced it in 1920. Now, before we 
consider the experiences with this tax, it must be remembered that we can 
learn little one way or another, either for or against it, from Mexico, or 
Cuba, or the Philippines, or Canada, all of which are countries of insig- 
nificant economic proportions, where we do not find the real kind of sales 
tax that we have been discussing today. 



TAXATION 195 

Democracies Oppose Sales Tax Laics 

Again (p. 74): 

The proposition now is to take off one of those three chief categories — 
the tax on excess profits — and remove the burden from profits on wealth 
or income, and put it on the other or consumption side. This would, in 
my opinion, unduly shift the balance and bring us too near the position 
formerly occupied by all the aristocracies of old, and still reflected in 
some of the European countries. . . (p. 75) : Why is it that England and 
America show their democracy, their real democracy, so much more than 
countries in the difficult position of Italy, or France, or Germany? There 
you will find throughout the war, and even now, the great mass of taxes 
imposed upon the consumption of the common man ; whereas in England 
and in the United States during the Great War, as over against our 
experiences in the Civil War, the great majority of taxes are raised from 
wealth; that is, from those who can afford to pay, rather than from the 
consumption of the necessaries and comforts of life. . . After the United 
States, the two countries of the world which are making the most progress 
in fiscal reform are England and Italy— for Italy is doing better than 
France. When these two countries came to consider this problem they 
went into the question of a sales tax thoroughly and finally rejected it. 
On the other hand, the two big countries of the world that have adopted 
the sales tax, Germany and France, did so only as a last resort, after 
exhausting every other available source of taxation. . . Germany was forced 
to this sales tax in the last extremity, and in France the same is true. . . 
I have been in California for eight months, and had the pleasure some 
time ago of addressing a large body of business men in San Francisco 
assembled to discuss this question. I found that the situation was pre- 
cisely that which was presented by our committee. Everyone was anxious 
to get rid of the profits tax, everyone had heard that here was a way out, 
and it captivated them all; every man in that room was in favor of a 
general sales tax. But after I had talked with them, not so much in 
opposition as trying to show that there was another side of the question 
which they must begin to study, it was marvelous to see what a change 
came over them; not because I spoke — because everyone would have done 
just as well — but simply because attention was now called to some of the 
less obvious aspects of the case. 

A sales tax on the sales of capital would ruin New York City as the 
financial center of the country. A sales tax on the necessaries of life 
would evoke a political struggle the like of which we have never seen 
in this country (p. 77). 

The sales tax represents an attempt to put an undue, an extravagant 
burden upon the consumer, instead of on the producer or the possessor 
of wealth, (p. 79). 

Dr. Seligman discloses Messrs. Kahn, Bache, Rothschild, 
and others of like antecedents from the "aristocracies of old" 
favor a sales tax. 

I will willingly leave my colleagues in Congress to say whose 
advice is to be considered. Shall it be that of a man whose 
judgment is not warped by personal or pecuniary interests, 
who handles the subject with the mind of a master, Seligman, 
whose opinion is supported by two great tax-investigating com- 
mittees, by the experts of the Treasury, who have spoken 
through Secretary Houston, and by a dozen reputable witnesses 
quoted? Whom shall we follow in placing a billion-dollar tax 
on the backs of the people? Shall we accept these authorities 
or shall it be the wabbler and waverer banker and broker with 



ig6 SELECTED ARTICLES 

his New York colleague, who spends eleven months a year, 
according to his own admission, in trying to dodge taxes ? There 
can be but one answer. 

Lest We Forget 

A terrible war has swept over the world, leaving sorrow and 
misery strewn everywhere along the trail. The struggle with 
arms registered over a score of million men dead, wounded, or 
missing, but this was only one item of the losses. Social, indus- 
trial, and governmental upheavals have spread like a prairie fire 
from the war conflagration. 

In our own land innumerable battles have been fought, 
as bitter and lasting in effect as those occurring over three 
thousand miles away. No statistics will ever record the broken 
homes, sicknesses, sacrifices, and deaths that have no place in 
history's battles nor of secret struggles when giving away mil- 
lions of their best treasures — their boys. Nor will history ever 
properly record the taking of everything not nailed down 
during that war by profiteers who robbed the Government and 
robbed the public without limit or conscience. Scars are not 
yet healed, for the people have long memories. 

Fortunes have been amassed and laid away that were wrung 
from the necessities of our Nation and of the people. That is 
only one chapter from the record, but that is a chapter with 
which we are now concerned because profiteering and pilfering 
of the public has been a continuous performance whenever op- 
portunity exists, and it is brought forcibly to mind by the 
proposal and powerful propaganda to repeal the excess profits 
law and enact a general sales tax. 

The Jobless Will Equally Pay a Sales Tax 

In a report from the Department of Labor of January 26, 
just issued, the statement is made that 3,473,466 jobs have been 
lost within the past year and industry has been reduced approxi- 
mately 40 per cent. In the face of this record Congress is now 
asked to exempt from taxation those who accumulated enormous 
profits in great corporate business and also to slash deep the 
surtaxes of those whose individual incomes reach high levels. 
According to Bache, who heads the sales-tax propagandists, 
these taxes now paid out of large profits and high incomes 
should be shifted on to the three and a half million jobless, 
who with their dependents must buy food, heat, and clothes. 



TAXATION 197 

with an alternative, according to Bache, expressed with grim 
humor, "to merely refrain from consuming" (p. 58). 

That advice is more cruel than Marie Antoinette's, "If they 
can't get bread, why not eat cake?" Bache has many disciples 
in this country and in the world today, but only the blind fail 
to see that an autocracy of wealth may become the handmaid 
of a military autocracy which the world has temporarily de- 
stroyed. 

Those who try to view conditions without bitterness or preju- 
dice find the greatest danger to our body politic today lies in 
the ruthless crushing of the individual, the cupidity and selfish- 
ness of men, and a modern-day arrogance of wealth, that in turn 
demands its protection from those whom it crushes. 

In this day of world-wide commercial struggles, when the 
individual becomes swallowed up in the maelstrom, it is well 
to remember that under our form of government the humblest 
and poorest is entitled to equal rights of life, liberty, and the 
pursuit of happiness, unless it is to become a lost paragraph 
from our Constitution, and that next to liberty the most fre- 
quent cause for historic struggles has come from unjust taxa- 
tion, with its accompanying oppression. 

Other Tax Issues Not Discussed 

I have presented what I believe to be facts and authorities 
that effectually discredit the present effort to saddle a turnover 
sales tax on the people of this country. One of the greatest 
campaigns for the tax is now being waged in Washington and 
throughout the country. The stakes are higher than with any 
legislative program in recent years because the plan proposes 
to shift the $800,000,000 to $1,000,000,000 in annual excess profits 
taxes over onto the under fellow. 

Money is plentifully supplied to press this propaganda upon 
Congress. Every man who pays excess profits taxes in Con- 
gress will be pressed to join the movement, irrespective of eco- 
nomic, governmental, or political results. I have not sought to 
discuss the repeal of excess profits taxes nor the proper limit 
to place on personal income surtaxes. Nor have I assumed to 
discuss a constitutional amendment that will reach the hoarded 
wealth of Jules Semon Bache and others who invest their 
wealth in tax-exempt securities. 

I have not presented the alternative of taxing capital now 



ig8 SELECTED ARTICLES 

being pressed in other countries, notably England, and by large 
farming organizations and some labor organizations in our own 
country, nor have I dwelt on the fact that while England re- 
fuses to give up her excess profits tax and rejects a sales tax 
without any consideration, special interests most concerned here, 
following the example of the railway bill propaganda of last 
year, are straining every nerve to do here what England dare 
not do across the water, and I use the term "dare not" ad- 
visedly when referring to a turnover sales tax. 

The Price Is Too Great to Pay 

I have not discussed the political liability of a turnover con- 
sumption tax, nor have I indulged in useless predictions of what 
reward will be measured out to Representatives who listen to 
the siren song of the propagandists and fail to represent those 
back home those who will be called on to pay the bill — a billion- 
dollar tax bill — in addition to other taxes, local and Federal. 
These are all fruitful fields for discussion and may be covered 
before any turnover consumption tax is passed by Congress. I 
have tried to place before you the judgment of recognized ex- 
perts, expressed both individually and through united action, 
all of whom condemn the passage of a general sales tax in this 
country in time of peace. Their views have not been given to 
Congress in any public hearings to my knowledge, although 
sales tax advocates led by an amateur expert who wabbles and 
wavers have been given full hearings by our committee with 
accompanying wide publicity through the press. 

To my own mind the time is one of great concern. The 
future does not rest alone on the resumption of business but 
also on the willingness of men of large means to shoulder their 
full share of governmental and tax burdens. Temporary suc- 
cess of any sales tax measure will occasion loss of respect for 
property and of those who succeed. 

The price is too great and one that even those drunk with 
power may well hesitate to pay. 

BRIEF EXCERPTS 

Any tax on what men have is better than a tax on what men 
need. Tom L. Johnson. Congressional Record. 26:1652 January 
30, 1894- 



TAXATION log 

The [sales] tax, if shifted to the consumer, violates the 
fundamental law of equality of taxation. Edwin R. A. Seligman. 
Proceedings of the Second National Industrial Tax Conference, 
p. 74- 

We collected in the last fiscal year something over 
$1,000,000,000 from consumption taxes, as I interpret the term 
"consumption taxes." That constituted about 2 per cent of the 
total internal tax budget. I think that it would be wrong to 
double that percentage. Thomas S. Adams. Proceedings Second 
National Industrial Tax Conference, p. III. 

No man that ever had anything to do with the marketing of 
farm products, whether as producer, seller, or buyer, would 
claim that the farmer could pass this tax on to the purchaser. 
The price of wheat is fixed usually by the Liverpool market. 
Liverpool will pay this price and no more, wliether there is or 
is not a tax on the sale by the farmer. The price of corn is 
determined by the Chicago market. The corn grower is offered 
so much for his corn at the elevator. Of course, he can not pass 
that on. He will have to pay it. William R. Green. Hearings 
before the Committee on Ways and Means. 192 1. p. 86. 

Regarding the effects [of the sales tax] upon business, the 
testimony of a distinguished French scholar is worth citing. 
Gaston Jeze writes : "The tax is essentially a tax upon expendi- 
tures — the worst kind of tax for both producers and consumers 
At this very time it tends to increase the price in a formidable 
manner ; in consequence, it helps to restrain consumption ; it 
helps to close channels of sales at the moment when it is neces- 
sary to open new ones. In my opinion, the tax upon sales prices 
is responsible in large measure for the economic crisis which 
has now begun and bids fair to be long and terrible." Nation. 
112:683 May 11, 192 1. 

The Wall Street Journal gives the following facts about the 
French turnover tax: 

While estimated to produce as much as 460,000,000 francs in 
a month, the highest actual month's revenue from this source 
is 234,000,000 francs in September, while the lowest is recorded 
for March, 147,000,000 francs, against the estimated 415,000,000 



200 SELECTED ARTICLES 

francs. In the concluding five months of last year, the tax hav- 
ing only come into practical operation last August, the yield 
was less than 1,000,000,000 francs instead of the expected 
2,000,000,000. Moreover, during the eight months of its opera- 
tion the yield has consistently declined. Literary Digest. 69:70 
May 7, 1921. 

The principal defect [of the sales tax] lies in the premium 
that such a tax would place upon synthesized business. The 
small business which confined itself to one branch of manufac- 
ture or sale and bought its stock from an independent business 
concern would be forced to charge higher prices than the large 
trust, which produced or mined its raw materials, transported 
them in its own ships to its factories, and finally sold the finished 
product through its own distributive agencies. And if we at- 
tempt to meet this fundamental objection by confining the tax 
to articles sold for "consumption and use," we meet an almost 
insoluble problem of classification. Thomas S. Adams. Proceed- 
ings Twelfth Annual Conference National Tax Association. 
{19 19) P- 312. 

It needs no argument to show that the standard of consump- 
tion inequitably distributes the burden. The millionaire, with 
his income of $50,000 a year, cannot eat or wear a hundred times 
as much as the day laborer with his income of $500 a year. 
Nor in the ordinary course of events does he spend a hundred 
times as much on travel, horses, furniture, or any of the other 
luxuries of life. Taking the country through, it is safe to say 
that expenditure does not increase in proportion to property or 
income. The conclusion is inevitable that the poorer a man is, 
the larger his proportionate share of the burden of taxation; 
whereas, if there were to be any inequality whatever, the richer 
a man, the larger relatively should be his share. Robert Luce. 
Public Opinion. 13:51 April 23, 1892. 

To those who are not unacquainted with the ways of finan- 
cial interests, the mere fact that the proposition [the increase of 
the rate of sales tax] emanates from their councils is enough to 
provoke suspicion, and when it is affirmed that the tax is "passed 
along in small fractions and is finally paid by the consumer, 
practically without his knowledge, and the additions are so trif- 



Taxation 201 

ling as not materially to affect prices," that such a tax would 
raise more revenue than the country actually needs, and that its 
adoption would lead to repeal of the excess profits tax and the 
income tax, one begins to detect the "nigger in the wood-pile." 
It takes a wizard of finance to maintain that some $500,000,000 
a year can be painlessly extracted from the people of Canada. 
Winnipeg Grain Growers' Guide. 

An effort is being made by those who represent "Big Busi- 
ness" to shift the burden of taxes from the profiteers to the 
masses. First, they demand the repeal of the excess profits tax 
and the substitution of other taxes that burden all. The excess 
profits tax is the most just tax there is — it is collected srom 
those who collect excess profits — that is, larger profits than they 
should. It is the only tax that a taxpayer can avoid by his own 
act — let him stop stealing and he will not have to divide with 
the government. And yet this is the one tax that the reaction- 
aries want repealed. The next demand is for the lowering of 
taxes on big income and an increase in the rate on smaller in- 
comes — as bold a piece of piracy as was ever proposed. William 
J. Bryan, Commoner. 21:1 August, 192 1. 

Those who defend the equity of the sales tax under the as- 
sumption that it will be completely shifted, must attempt to dem- 
onstrate that the gross expenditure is a more exact and satis- 
factory standard of ability to pay than net income. This is a 
hopeless task. A standard of gross expenditure would relieve 
savings from all taxes. Our greatest savers are the richest 
classes. But not only would the sales tax apply to a much larger 
share of the small man's income than of the rich man's, but the 
tax would also fall just as heavily on the small man's dollar as 
on the rich man's. This will not appeal strongly to those who 
believe in the equity of progressive taxation. Indeed, the sales 
tax is grossly unfair to the poor man, and should be dropped for 
that reason alone. Nation. 112:683 May II, 1921. 

The sales tax, in any form proposed, whether a turnover 
tax or a tax on retail sales only, violates the cardinal principle 
of ability to pay. The tax would be paid by the bankrupt as 
well as by the individual or corporation with a net income. 
Such a tax would retard the movement of stocks put in at 



202 SELECTED ARTICLES 

higher prices, and hence is peculiarly unfitted to the present 
industrial situation. It would be unjust as between competitors 
in the same industry depending on the degree of integration 
in the various industries. It would be particularly odious and 
heavy in those industries where the turnover would be rapid in 
proportion to capital invested. More important still, it is an 
indirect tax, to a certain extent, and if adopted would abide 
with us to an extent that a direct tax would not. The direct 
tax has the distinct advantage of making those who pay it 
watchful of governmental expenditures and governmental effici- 
ency. Clyde L. King. Annals of the American Academy 97:72. 
Sept. 192 1. 

Further consideration of the subject has convinced me that 
a general sales or turnover tax is altogether inexpedient. It 
would apply not only to the absolute necessities of life — the food 
and clothing of the very poor — but it would similarly raise the 
prices of the materials and equipment used in agriculture and 
manufactures. It would confer, in effect, a substantial bounty 
upon large corporate combinations and trusts and place at corre- 
sponding disadvantage the smaller or disassociated industries 
which carry on separately the business operations that in many 
combinations and trusts are united under one ownership. The 
group of independent producers would pay several taxes, the 
combination only one tax. Finally, it would add a heavy ad- 
ministrative load to the Bureau of Internal Revenue which — 
burdened as it is with the responsibility of enforcing the child- 
labor tax law, the national prohibition act, the narcotic-drug 
law, the adulterated butter and mixed-flour tax laws — is already 
near the limit of its capacity. Secretary David F. Houston. Re- 
view of Reviews. 

It cannot be questioned that ability to pay is the only just 
and practicable basis for the apportionment of taxes, or that 
this ability increases with increasing income at a rate more rapid 
than the increase of the income itself. Nor can it be doubted 
that, although a social reform cannot be effected through any 
conceivable use of taxing machinery, yet the conditions under 
which a more healthful social evolution can take place than is 
observed at the present time may result from the manner in 
which the taxing machinery is employed. This, as well as the 
idea of equity, induces the mind to consent to the principle of 



TAXATION 203 

progression. It may further be conceded that the fear enter- 
tained by English economists lest the accumulation of capital 
and the development of industry should be arrested by progres- 
sive taxation is not warranted by the facts in the case ; but, on 
the other hand, that the principle of progression judiciously ap- 
plied will tend to invite experimentation and give an opportunity 
to energy under conditions likely to be the most conducive to 
industrial and social development. Each of these arguments 
considered by itself seems to warrant confidence in the theory 
of progressive taxation. Henry C. Adams. The Science of Fi- 
nance, p. 352. 

A still more important objection to indirect taxation is that 
when imposed on articles of general use (and it is only from 
such articles that large revenues can be had) it bears with far 
greater weight on the poor than on the rich. Since such taxa- 
tion falls on people not according to what they have, but accord- 
ing to what they consume, it is heaviest on those whose con- 
sumption is largest in proportion to their means. As much sugar 
is needed to sweeten a cup of tea for a working girl as for the 
richest lady in the land, but the proportion of their means which 
a tax on sugar compels each to contribute to the government is 
in the case of the one much greater than in the case of the other. 
So it is with all taxes that increase the cost of articles of general 
consumption. They bear far more heavily on married men than 
on bachelors ; on those who have children than on those who 
have none ; on those barely able to support their families 
than on those whose incomes leave them a large surplus. If the 
millionaire chooses to live closely he need pay no more of these 
indirect taxes than the mechanic. I have known at leas't two 
millionaires — possessed not of one, but of from six to ten 
millions each — who paid little more of such taxes than ordinary 
day laborers. Henry George, Protection or Free Trade, p. 78-g. 

Ought what a person consumes to determine the portion that 
he should contribute to the support of the government? This 
theory, which is one of the oldest in economic history, an able 
writer states as follows : "Every man ought to be taxed on all 
that property which he consumes or appropriates to his exclusive 
use." In opposition to this view it may be said, in the first place, 
that it is economically impossible for the government to take 



20 4 SELECTED ARTICLES 

anything for its support from a man who does not earn the 
bare necessities of life. To attempt to do so would result only 
in failure. For what the State took away from such a man with 
one hand as a taxpayer it must return to him with the other as 
a pauper. 

In the second place, on what ethical ground should we ex- 
empt men from paying a tax on that portion of their wealth 
that they do not consume? It is from what they have left after 
supplying the necessities of life that they are most able to con- 
tribute to the expenses of the government. The first maxim of 
a just system of taxation, that a person should contribute to the 
public revenue according to his ability, is plainly violated by such 
an exemption. The man with millions and few personal ex- 
penses might often by this arrangement contribute less to the 
support of the government than a day laborer with a large fam- 
ily who possessed almost nothing. 

It can hardly be doubted that our national taxes upon salt, 
coal, clothing, and the materials used in the construction of 
dwellings, violate the very first principles of justice and eco- 
nomics. They enhance the cost of mere subsistence, and any 
act of the government that does that is oppressive and unjust. 
They are as another expresses it, "a veiled or disguised tax on 
the wages of labor," and pre-eminently injurious to the welfare 
of the very classes they profess to benefit. Just as the property 
system of taxation oppresses the farmer and compels him to 
contribute far more than his due share to the public revenues, 
so the expenditure system, or a tax on consumption, oppresses 
the working classes, obliging them to pay not only their own 
taxes but a large proportion of the taxes of others. Frank S. 
Hoffman. The Sphere of the State, p. 120-1. 



PART III 
THE STATE INCOME TAX 



BRIEF 

Resolved: That this state should adopt a state income tax, sim- 
ilar to that in vogue in Wisconsin or New York. 



Affirmative 
Introduction: 

A. Meaning of the question. 

1. The income tax as a state measure. 

2. The revenue may be partly or largely returned to 
the cities and other local governments. 

B. Importance of the question. 

I. Our state and local governments are in need of more 
revenue. 

A. Modern progress requires that they have much more 
funds. 

i. To build and maintain good roads which have 
now become a necessity. 

2. To build, equip and operate good modern schools, 
in the rural districts and small towns, as well as 
in the larger cities. 

3. To provide proper public health service. 

4. To provide adequate play ground facilities for 
the children and recreation facilities for adults. 

5. To pay adequate salaries to public school teachers. 

B. In many states the cities are in dire need. 

1. The schools in New York City have been en- 
dangered. 

2. Several of the cities in Ohio have been compelled 
to borrow money to meet current operating ex- 
penses, short time notes being issued that were 
in some cases later refunded into long time in- 
terest-bearing bonds. 

II. Other forms of taxation have failed to yield the necessary 
revenue or are unsuited to the purpose. 



208 SELECTED ARTICLES 

A. The general property tax is everywhere an un- 
questioned failure. 

1. Much personal property, often two-thirds of it, is 
not even listed for taxation. 

a. This punishes honesty and rewards dishonesty. 

b. It puts an unjust and unfair burden upon the 
owners of real estate and other tangible prop- 
erty. 

2. Most property is greatly undervalued for the pur- 
pose of taxation, often as low as one-third of its 
true value. 

a. This is very unfair and unjust, because some 
forms of property are assessed at their full 
value, while others are lower than the average 
basis, 
(i) The property of widows and orphans is 

assessed at its full value. 
(2) The property of large corporations is 
assessed far lower than the homes of the 
poorer people. 

3. It is easily evaded by the richer people and the 
great corporations. 

a. Tax-dodgers often have their residence just 
outside of a large city or just across a state 
line. 

b. People determined to evade their honest share 
of taxation will often organize a suburban city 
or village and resist annexation, so as to have 
all the benefits of a great city without helping 
to pay for them. Almost every large city in 
America has one or more of these "satellite 
and parasite" communities. Sometimes the city 
has grown and completely surrounded the tax- 
dodgers' nest. 

c. Large corporations will often have their 
"main" office in some small town where taxes 
are low, or where they can control the officials. 

d. The property of the poor is of such kind as is 
difficult to conceal or undervalue, while the 
opposite is true of the property of the rich. 



TAXATION 209 

4. It often results in double taxation. 

a. In some states land worth $10,000 is taxed at 
its full value, and a mortgage of $5,000 is 
taxed at its face value. 

5. It taxes all property at the same rate, which is un- 
fair and unjust. 

a. All property is not equally productive. 

B. Corporation taxes cannot be raised in most states. 

1. Corporations pay taxes upon their property under 
the general property tax. 

2. In most states they are called upon to pay special 
taxes, such as fees, licenses, franchise taxes, 
capital stock taxes or some similar special tax. 

C. The federal government has enacted an inheritance 
tax. 

1. The federal tax sums up to 25 per cent. 

2. Any additional tax would be an unfair and unjust 
burden. 

D. The poll tax is unjust and unprofitable. 

III. A state income tax, similar to the one adopted in Wiscon- 
sin or New York, is desirable. 

A. It is certain in its yield. 

B. It is just and equitable — it taxes people in proportion 
to their ability to pay. 

C. It is easy to collect. 

D. It is difficult to evade. 

E. It is impossible to shift it. 

IV. A state income tax is practicable. 

A. It has been successfully employed in many places. 

1. It has been long used in several other countries. 

2. It has been employed in many states of our union. 

3. It has recently been remarkably successful in Wis- 
consin, Massachusetts, New York, and some other 
states. 

B. A state income tax does not interfere with the fed- 
eral income tax. 

1. None of the thirteen states that have a state in- 
come tax have noticed any difficulty or interfer- 
ence because of the federal tax. 

2. All taxes must be paid out of income. 



210 SELECTED ARTICLES 

3. The federal government now cooperates with the 
states to decrease the cost of collection and pre- 
vent evasion. 



Negative 
Introduction : 

A. The negative does not deny the merits of the income 
tax as a federal measure, but we do deny that any 
success of the income tax as a federal measure will 
prove it would be equally successful as a state system. 

B. We must judge its worth by its history in the different 
states as a state measure. 

I. The income tax is a source of revenue that should be left 
to the federal government. 

A. Our entire scheme of taxation must be readjusted to 
meet the conditions that the World War has produced. 

1. The federal government is now in dire need of 
more revenue. 

2. For several generations to come the national war 
debt will require greatly increased income for the 
federal government. 

B. There should be complete cooperation and harmony 

between the states and the federal government in the 
matter of taxation. 

1. No state can be justified in taking a course that 
will annoy or embarrass the national government. 

C. Nation-wide uniformity in the rate of income taxation 
is best. 

1. It will decrease the uncertainty which is a serious 
interference with industry. 

2. It will prevent duplication of the tax machinery. 

II. State income taxes have many objectionable features and 
results. 

A. A state income tax is easily evaded by the richer 
people. 

1. A person can take up a residence across a state 
line. 

2. Corporations can reincorporate in another state. 



TAXATION 211 

3. No state can compel a corporation, incorporated in 
another state though doing business within its 
limits, to reveal the stock or bond holdings or the 
dividends received, by one of its own citizens, 
a. It is therefore impossible for a state to employ 
the principle of stoppage at source in col- 
lecting its state income tax. 

B. It puts a premium upon falsehood and evasion, which 
has the effect of a handicap upon honesty. 

1. In the keen competition of the business world, 
the rascals are helped to survive by state income 
taxes. 

C. It is particularly unwise for any state to tax the citi- 
zens of other states, as is done by the income tax law 
of New York and several other states. 

1. It has always been the law that personal property 
shall be taxed according to the domicile of the 
owner. 

2. It violates the principle of no taxation without 
representation. 

3. It creates and develops bad feeling among the 
states and will lead inevitably to retaliatory mea- 
sures. 

4. If all states adopt this provision, it will mean uni- 
versal double taxation, with frequent triple and 
quadruple taxation. 

III. The income tax is impracticable as a state measure. 

A. The experience of our states with the income tax 
shows that it has failed in most of the cases where it 
has been tried. 

1. It has failed in all of the states where it has been 
in effect for any considerable number of years. 

2. The states in which it is claimed to be a great suc- 
cess are the ones where it has only recently been 
adopted. 

B. What our states and cities need is not more revenue, 
but more efficiency, economy, and honesty in their ad- 
ministrative service. 

C. The adoption of a state income tax does not mean the 

repeal of the general property tax. 



212 SELECTED ARTICLES 

i. Wisconsin in 1919 raised about ten times as much 
revenue from its general property tax as it did 
from its income tax. 

2. Most of the state commissions that have recom- 
mended the adoption of the income tax have 
stated that it was to supplement the general prop- 
erty tax, not to supplant it. 



BIBLIOGRAPHY 

An asterisk (*) preceding a reference indicates that the article or 
a part of it has been reprintea in this volume. A dagger (t) is used to 
indicate a few of the other best references. The references listed here 
deal with the income tax as a state measure. For further references to 
books and articles on the income tax in general, see Miss Phelps's book 
named below. 



Other Bibliographies 

American Economic Association, Publications. 3d series. 4 : 684. 
N. '03. Delos O. Kinsman. 

Bulletin of the University of Wisconsin ; serial no. 329 ; gen- 
eral series no. 194. S. '09. 7p. 

Holgate, Josephine. Select list of works relating to the income 
tax. State Library, Olympia, Wash. 1910. 23P. 

Kennan, Kossouth K. Income taxation : methods and results 
in various countries. Burdick and Allen. 1910. 
p. 336-42. Bibliography of books and magazine articles consulted and 

cited. 

Meyer, H. H. B. List of recent references on the income tax. 
Library of Congress. 96p. 1921. 

Phelps, Edith M. Selected articles on the income tax. (De- 
baters' Handbook Series) H. W. Wilson Co. 1917. 
p. IX-XXXIII. Bibliography. 

Seligman, Edwin R. A. The income tax. Macmillan. 1914. 
p. 707-31. Bibliography. 



General References 

Books and Pamphlets 

Beard, Charles A. Readings in American government and 

politics. Macmillan. 1910. 

Chap. 31. p. 590-605. Taxation and finance. 
Black, Henry C. A treatise on the law of income taxation 

under the federal and state laws. Vernon Law Book Co. 

1913. 



2i 4 SELECTED ARTICLES 

Bliss, W. D. P. The new encyclopedia of social reform. Funk 

& Wagnalls. 1908. 

p. 600-3. Income tax. 
Bullock, Charles J. Select reading in public finance. Ginn & 

Co. 1920. 

p. 401-6. The income tax in the American commonwealths. Delos O. 
Kinsman. 

p. 406-22. The Wisconsin income tax. Thomas S. Adams. 

p. 445-59- The separation of state and local revenues. Charles J. 
Bullock. 

p. 469-90. The state income tax and the classified property tax. 

Bureau of the Census. Financial statistics of states 1919. H9p. 

1920. 
California. Report of the Commission on revenue and taxation. 

1906. pamphlet. 296P. 
Civic Federation of Chicago. Apace with progress — the case 

for tax revision. 1916. 
*Civic Federation of Chicago. Constitutional Convention Series, 

study no. 2 . Taxation and public finance. 76p. Ag. 1919. 
Civic League of Cleveland. Taxation in Ohio. 1915. pamphlet. 

I9P. 
Connecticut. Report of the special commission on the taxation 

of corporations. 1913. pamphlet. 238P. 
Equitable Trust Company of New York. New York state in- 
come tax on individuals. 1920. pamphlet. 49p. 

Fillebrown, C. B. Taxation. A. C. McClurg & Co. 1914. 

p. 95-7. State income taxes. 
Indiana. Second annual conference on taxation in Indiana, 

under the auspices of the extension division of the Indiana 

University and the Indiana state tax association. 1914. I9ip. 
Leland, Simeon E. Taxation in Kentucky. University of Ken- 
tucky. 1920. 

Chap. 6. The income tax. 
McLaughlin, A. C, and Hart, A. B. Cyclopedia of American 

government. D. Appleton & Co. 1914. 

Vol. 3. p. 490-1. Income tax. 
National Tax Association. State and local taxation : second 

national conference. 1909. 

p. 279-80. Income taxation (in Ontario). 
National Tax Association. State and local taxation : third 

national conference. 1910. 

p. 213-26. Relations of state and federal finance. Edwin R. A. Selig- 
man. 



TAXATION 215 

National Tax Association. State and local taxation : fourth 
national conference. 191 1. 

p. 122-38. Discussion on state income tax. 

National Tax Association. State and local taxation : fifth annual 
conference, addresses and proceedings. 1912. 
p. 103-13. Wisconsin income tax law. K. K. Kennan. 

National Tax Association. State and local taxation : sixth an- 
nual conference, addresses and proceedings. 1913. 
P 321-33. The Wisconsin income tax. Nils P. Haugen 

National Tax Association. Tenth annual conference, proceed- 
ings. 1917. 
p. 362-84. The state income tax and the classified property tax. 

Charles J. Bullock. 

p. 394-7. Income taxes (enacted during 1916). 

National Tax Association. Eleventh annual conference, pro- 
ceedings. 1918. 

p. 50-5. Taxation in Oklahoma. Campbell Russell, 
p. 92-101. Massachusetts's first year of the state income tax. Henry 

H. Bond. 

p. 244-7. New York income tax law. 

National Tax Association. Twelfth annual conference, proceed- 
ings. 1920. 
p. 386-97. State income taxation with special reference to the New 

York income tax law. Laurence A. Tanzer. 

National Tax Association. Thirteenth annual conference, pro- 
ceedings. 1921. 

p. 274-83. A model state income tax act. Henry H. Bond. 

p. 284-301. Some aspects of the problem of uniform state income 
tax legislation. Harley L. Lutz. 

P- 301-5. Discussion of state income taxation. Mark Graves. 

p. 306-15. Domicile as the criterion of liability to personal income 
taxation. Irving L. Shaw. 

p. 317-22. Suggestions on state income taxation. Frank D. Strader. 

p. 322-9. Discussion of state income taxation. Carl C. Plehn et al. 

National Tax Association. Preliminary report of the com- 
mittee appointed by the National Tax Association to prepare 
a plan of a model system of state and local taxation. 1918. 
pamphlet. 45p. 

Nelson, H. B. The Wisconsin income tax. University of 
Wisconsin. (Extension Division. Commercial Education 
Series) I9ip. 1921. 

New York. Annual report of the state tax commission. J. B. 
Lyon Co. 1919. 
p. 81-118. Status of taxation in other states. 

New York. Second state conference on taxation. Buffalo. 
Jan. 1912. J. B. Lyon Co. 
p. 455-9. A state corporation net income tax. Allen R. Foote. 



216 SELECTED ARTICLES 

Phelps, Edith M. Selected articles on the income tax. (De- 
baters' Handbook Series) H. W. Wilson Co. 1917. 

Plehn, Carl C. Introduction to public finance. Macmillan. 1920. 
p. 287-90. State income taxes in the United States. 

Seligman, Edwin R. A. The income tax. Macmillan. 191 1. 
p. 388-429. State income taxes. 

Wisconsin. Eighth biennial report of the Wisconsin Tax Com- 
mission. 1916. 
p. 41-73. The income tax. 

Wisconsin Legislative Reference Library. Income tax laws : 
brief digest of the laws of the states of the United States. 
I2p. typewritten. 1920. 

Periodicals 

American Economic Review. 1 : 906-9. D. '11. Wisconsin 
income tax. Thomas S. Adams. 

American Economic Review. 10 : 66-91. Mr. '20. The prog- 
ress of state income taxation since 191 1. Harley L. Lutz. 

American Economic Review. 10 : 259-71. Je. '20. Fiscal as- 
pects of state income taxes. Alzada Comstock. 

Annals of the American Academy. 58 : 59-64. Mr. '15. The 
relation between federal and state taxation. James E. Boyle. 

Annals of the American Academy. 58 : 65-76. Mr. '15. The 
Wisconsin income tax. K. K. Kennan. 

Annals of the American Academy. 58 : 77-86. Mr. '15. The 
Wisconsin income tax. Thomas E. Lyons. 

Annals of the American Academy. 58 : 131-9. Mr. '15. Separa- 
tion of state and local revenues. Thomas S. Adams. 

Bulletin of the National Tax Association. 1 : 59-61. Ap. '16. 
New York state income tax. J. F. Zoller. 

Bulletin of the National Tax Association. 1 : 125-8. Je. '16. 
Massachusetts income tax. Charles J. Bullock. 

Bulletin of the National Tax Association. 1 : 129-30. Je. '16. 
Shall we tax the non-resident. Thomas S. Adams. 

Bulletin of the National Tax Association. 2 : 46. N. '16. Ad- 
ministration of the new Massachusetts income tax. Henry 
H. Bond. 

Bulletin of the National Tax Association. 2 : 158-64. Mr. '17. 
Wisconsin income tax. 

Bulletin of the National Tax Association. 4 : 119-24. F. '19. 
The taxation of incomes under the New Hampshire constitu- 
tion. Albert O. Brown, 



TAXATION 217 

Bulletin of the National Tax Association. 5 : 40-50. N. '19. 
The taxation of non-residents in the New York income tax. 
Edwin R. A. Seligman. 

Bulletin of the National Tax Association. 5 : 73-5. D. '19. 
Distribution of income taxes to localities. T. E. Lyons. 

Bulletin of the National Tax Association. 5 : 244-6. My. '20. 
Collection of state income taxes from non-residents. Walter 
N. Seligsberg. 

Bulletin of the National Tax Association. 6 : 126-8. Ja. '21. 
State income taxes : safeguarding the yield : methods em- 
ployed in Delaware. A. E. Holcomb. 

Bulletin of the University of Washington. University Exten- 
sion series no. 12. General series no. 84. Ag. 1914. Tax- 
ation in Washington ; papers and discussions of the state 
tax conference at the University of Washington. My. 27-9, 
1914. 
p. 235-9. State income taxes. Charles J. Bullock. 

Economic World, n.s. 17 : 595. Ap. 26, '19. The new income 
tax law of the state of New York. 

Economic World, n.s. 17 : 737. My. 24, '19. The new income 
tax law of the state of New York. Eugene M. Travis. 

Journal of Political Economy. 26 : 952-69. D. '18. The tax- 
able income of the United States. David Friday. 

Monthly Bulletin of the Chamber of Commerce of the State of 
New York. 2 : 21-32. Je. '10. The personal property tax; 
report of the committee on state and municipal taxation. 

National Municipal Review. 8:202. Mr. '19. Municipal and 
state income taxes. 

North American Review. 190 : 615-27. N. '09. The relations of 
state and federal finance. Edwin R. A. Seligman. 

Political Science Quarterly. 10 : 221-47. Je. '95. Income tax 
in the American colonies and states. Edwin R. A. Seligman. 

Political Science Quarterly. 28 : 569-85. D. '13. Significance 
of the Wisconsin income tax. Thomas S. Adams. 

Quarterly Journal of Economics. 31 : 1-61. N. '16. The tax- 
ation of property and income in Massachusetts. Charles J. 
Bullock. 

Survey. 35 : 475-6. Ja. 22, '16. The toe of the Puritan stock- 
ing. William L. Garrison, Jr. 



218 SELECTED ARTICLES 



Affirmative References 

Books and Pamphlets • * - 

California. Report of the state tax commission. State Printing 

Office. 1917. 

p. 110-20. State income tax. 
*Ely, Richard T. Outlines of economics. Macmillan. 1919. 

p. 720-3. Income taxes. 
Ely, Richard T., and Finley, John H. Taxation in American 

states and cities. Thomas Y. Crowell & Co. 1888. 

p. 287-311. Taxation of incomes. 
Georgia. Report of the special tax commission. Byrd Printing 

Co. 1919. 

p. 7-12. Present system a failure. 
Howe, Frederic C. Wisconsin, an experiment in democracy. 

Scribners. 1912. 

Chap. 10. p. 133-9. Equalizing the tax burdens. 
Louisiana. Report of the assessment and taxation commission 

to the constitutional convention. 1921. 

*p. 34-47. The income tax. 

Appendix C. p. 100-14. Massachusetts income tax. 

Appendix F. p. 172-9. Report of the National Tax Association. 

Maryland. Minority report of the tax commission. 1886. 
Massachusetts. Report of the special tax commission. 1916. 
Massachusetts. Report of the tax commissioner for the year 

ending Nov. 30, 1918. 1919. 

p. 22-58. The taxation of incomes. 
*Michigan. Report of the board of state tax commissioners 

and state board of assessors. Wynkoop Hallenbeck Crawford 

Co. 1920. 

p. 25-46. Income tax. 
Mill, John Stuart. Principles of political economy. 1848. 

Book 5. Chap. 3. sec. 5. The income tax. 
Minnesota. Report of the special tax commission. 1902. 
Minnesota. Report of the state tax commission. 1912. 

p. 153-64. State income taxation. 
Mississippi. Joint report of the senate and house committees 

appointed at the session of 1916 to consider the state's reve- 
nue system and fiscal affairs. Tucker Printing House. 1918. 

p. 41-3. Income tax. 
Missouri. First biennial report of the state tax commission. 

Hugh Stevens Co. 1918. 

p. 171-90. Income tax law. 



TAXATION 2ig 

National Tax Association. State and local taxation. First 

national conference. Macmillan. 1908. 

p. 241- The taxation of incomes. Charles L. Raper. 
National Tax Association. State and local taxation. Fourth 

national conference. 191 1. 

p. 87-110. The income tax as a substitute for the property tax on 
certain forms of personalty in the state of Wisconsin. Thomas S. Adams. 

National Tax Association. Tenth annual conference, proceed- 
ings, 1917. 
p. 64-87. The income tax as a measure of relief for Indiana. William 

A. Rawles. 

National Tax Association. Twelfth annual conference, pro- 
ceedings. 1920. 

p. 435-44. The proposed personal income tax. Preliminary report 
of the committee appointed by the National Tax Association to prepare 
a plan for a model system of state and local taxation. 

Nebraska. Report of the special commission on revenue and 
taxation. Woodruff Press. 1914. 

p. 39-58. The general property tax. 
p. 1 7 1-7. Income taxation. 

*New York. Report of the joint legislative committee on tax- 
ation. J. B. Lyon Co. 1916. 

p. 31-54. The failure of the personal property tax. 

p. 55-102. Failure of the personal property tax in New York. 

p. 184-206. The income tax. 

fOhio. Report of the special joint taxation committee of the 
eighty-third general assembly. F. J. Heer Printing Co. 1919. 
p. 73-80. The income tax. 
p. 87-165. A report on the operation of state income taxes. Harley 

L. Lutz. 

Ohio. Second annual report of the tax commission. Springfield 
Pub. Co. 1912. 
p. 6-7. Income might be taxed. 

Pennsylvania. Report of the tax commission. 1889. 

South Carolina. Report of the joint special committee on reve- 
nue and taxation. 1921. 

p. 25-46. Our tax system: the facts, 
p. 87-97. The income tax. 

Virginia. Report of the state tax board. 1918. 

p. 34-45. The taxation of incomes. 

Wisconsin. Fifth biennial report of the tax commission. 1910. 

p. 9-18. General property tax. 
p. 19-27. Income tax. 

Wisconsin. Sixth biennial report of the tax commission. 1912. 

p. 10-23. General property tax; substitution of income tax for per- 
sonal property tax. 

p. 24-44. Income tax. 

p. 45-56. Proposed amendments to the income tax law. 



220 SELECTED ARTICLES 

Wisconsin. Seventh biennial report of the tax commission. 

1914. 

p. 90-140. The income tax. 
^Wisconsin. Tenth biennial report of the tax commission. 1920. 

p. 31-47- Income tax legislation recommended. 

p. 48-69. The income tax as a source of municipal revenue. Thomas 
E. Lyons. 

Zangerle, John A. Untaxed wealth of Cleveland and why : an 

exposition of the difficulties of administering the general 

property tax laws of Ohio in Cuyahoga county. S. J. Monck. 

1918. 

Periodicals 

American City. 21 : 538-40. D. '19. The tax problem as seen 
by a real estate man. C. C. Hieatt. 

Annals of the American Academy. 58 : 77-86. Mr. '15. The 
Wisconsin income tax. Thomas E. Lyons. 

Bulletin of the National Tax Association. 4 : 148-52. Mr. '19. 
Taxation of incomes in North Carolina. 

California Taxpayers' Journal. 3 : 12-13. S. '19. Shall we have 
an income tax? Clifton E. Brooks. 

California Taxpayers' Journal. 4 : 2-5. Ja. '20. Report on state 
income tax systems. M. D. Lack. 

California Taxpayers' Journal. 4 : 6-7. F. '20. Revenue pro- 
posals for the state. Carl C. Plehn. 

Minnesota Municipalities. 5 : 95-104. Ag. '20. The income tax 
as a source of municipal revenue. Thomas E. Lyons. 

New York State Tax Bulletin. 4 : 109-41. Ag. '19. The need 
of a state income tax. Laurence A. Tanzer. 

Outlook. 122 1254-5. Je. 11, '19. More about the new income 
tax in New York. Frederick M. Davenport. 

Political Science Quarterly. 34 : 521-45. N. '19. The New York 
income tax. Edwin R. A. Seligman. 

Quarterly Journal of Economics. 32 : 525-32. My. '18. The 
operation of the Massachusetts income tax. Charles J. 
Bullock. 

South Atlantic Quarterly. 18 : 289-98. O. '19. The present status 
of tax reform in North Carolina. C. Chilton Pearson. 



TAXATION 221 



Negative References 

Books and Pamphlets 

California. Report of the commission on revenue and taxation. 
1906. 

*Civic Federation of Chicago. A summary of the reports of spe- 
cial state tax commissions. 1007. 
p. 71-4. The income tax. 

Colorado. Report of the revenue commission. 1907. 

*Kennan, Kossouth K. Income taxation. Burdick and Allen. 
1910. 
p. 203-36. Income taxes in American colonies and states. 

Louisiana. Report of the assessment and taxation commission 
to the constitutional convention. 1921. 
*P- 55-6o. Minority report. 

Maine. Report of the special tax commission. 1890. 

Massachusetts. Report of the tax commission. 1897. 

*Minnesota. Second biennial report of the tax commission. 
1910. 
p. 156-69. Taxation of incomes. 

Minnesota. Third biennial report of the tax commission. 1912. 
p. 153-64. State income taxation. 

National Tax Association. State and local taxation: first na- 
tional conference. Macmillan. 1908. 
p. 93. Income tax entirely unsuited for state revenue. Lawson 

Purdy. 

*p. 445. State income taxes failures in practice. H. A. Millis. 

National Tax Association. State and local taxation : fifth an- 
nual conference : address and proceedings. 1912. 

p. 340-1. Report of the committee on practicable substitutes for the 
personal property tax. 

*National Tax Association. Proceedings eleventh annual con- 
ference. 1917. 
*P 50-5. Taxation in Oklahoma. 

New York. Report of the tax commission. 1902. 

*New York. Report of the special commission. 1907. 

*New York. Minority report of the joint legislative committee 
on taxation. 1916. 

t Seligman, Edwin R. A. The income tax. Macmillan. 191 t. 
p. 642-58. Shall the income tax be a state or a federal tax? 

Wisconsin. Report of the tax commission. 1898. 



222 SELECTED ARTICLES 

Periodicals 

^American Economic Association, Publications. 3d series. 4 : 
553-684. N. '03. The income tax in the commonwealths of the 
United States. Delos O. Kinsman. 

Annals of the American Academy. 58 : 65-76. Mr. '15. Wiscon- 
sin income tax. K. K. Kennan. 

Blackwood's Magazine. 178 : 279-84. Ag. '05. Tyranny of the 
income tax. 

Forum. 17 : 1-13. Mr. '94. Income tax: is it desirable? David 
A. Wells. 

Forum. 19 : 513-20. Jl. '95. Salutary results of the income tax 
decision. George F. Edmunds. 

Independent. 73 : 654-6. S. 19, '12. Income tax. William L. 
Phelps. 

Nation. 58 : 24-5. Ja. 11, '94. Graver evils of the income tax. 

North American Review. 130 : 236-46. Mr. '80. Communism of 
a discriminating income tax. David A. Wells. 

Public Opinion. 17 1335. Jl. 12, '94. Senator Hill's objections to 
the income tax. 

Quarterly Journal of Economics. 23 : 296-306. F. '09. The pres- 
ent period of income tax activity in the American states. 
Delos O. Kinsman. 

^Saturday Evening Post. 184 : 22. Je. 15, '12. Wrong income 
tax. 



INTRODUCTION 

In the best literature of taxation during the last decade of 
the nineteenth century and the first decade of the twentieth cen- 
tury, both in the reports of tax officials and tax commissions and 
in the writings of the recognized authorities on taxation, the 
preponderance of opinion was strongly against the income tax 
as a state measure. At the beginning of the third decade of the 
twentieth century the majority of the best that was said and 
written on the subject was in favor of such a tax. Moreover, 
several of the ablest authorities on taxation were opposed to the 
state income tax twenty years ago while the very same men 
are in favor of it now. Newspaper editorials and magazine ar- 
ticles have, for the most, followed and accepted this marked 
change in public opinion. 

There are two reasons for this complete change of attitude 
toward the state income tax: first, that no state had made a 
real success of its income tax until 191 1 when Wisconsin enacted 
the first efficient law of the kind; and second, that the recent 
and constantly increasing need of the state and local govern- 
ments for more revenue has made legislatures seek new forms 
of taxation. 

The state income tax is not a new and untried thing. Back 
in the colonial days, as early as the middle of the seventeenth 
century there were faculty taxes. The authorities are divided as 
to whether these faculty taxes were income taxes or not. Since 
the adoption of the federal constitution about one-half of the 
states have had an income tax at one time or another. At the 
present time about one-fourth of the states have such a tax. 
Several of these have adopted it within the last few years, that 
is, since the Wisconsin tax was adopted. In several other states 
there has been strong agitation for its adoption. 

The earlier state income taxes were unquestioned failures, 
due to inefficient administration. In several of the states the 
older income tax is still in vogue, and is still a complete failure. 
In Wisconsin, Massachusetts, New York and some other states 



224 SELECTED ARTICLES 

where the newer ideas have been employed, the state income 
tax is an unquestioned success. 

That the general property tax is everywhere a failure is the 
almost unanimous testimony of all who have written upon the 
subject. It is unfair, unjust, easily evaded, burdensome, and not 
sufficiently productive. At the same time the need for more 
revenue is constantly growing. States, cities, villages, towns, 
counties, and townships all over the country find their expenses 
growing at a rapid rate and their needs growing even faster. 
Modern progress makes each community demand more of its 
.local government. Better roads, better schools, reasonable sala- 
ries for teachers and others, adequate public health service, play- 
grounds, food inspection, and many other similar services are 
things which the citizens of every community are now demand- 
ing of their local governments. To get the funds to do these 
things is a serious problem. It is under these conditions that 
officials and scholars are turning to the state income tax. 



GENERAL DISCUSSION 

THE FAILURE OF THE PERSONAL PROPERTY 

TAX 1 

History of Tax in Europe 

We would like, did space permit, to trace the history of the 
personal property tax from mediaeval times down to the present 
day; to show how it was once in use in practically every country 
in Europe; how, as the earlier and simple economic structure 
gave way to modern complex development, its weakness and de- 
fects became apparent, so that one by one these countries 
abandoned it until today Switzerland is the only country in 
Europe where the general property tax still remains. We can- 
not do better in this connection than to quote briefly from Selig- 
man's Essays on Taxation, page 61 ; 

Historically, the property tax was once well-nigh universal. Far from 
being an original idea which the Americans instinctively adopted, it is 
found in all early societies whose economic conditions were similar to 
those of the American colonies. It was the first crude attempt to attain 
a semblance of equity, and it at first responded roughly to the demands 
of democratic justice. In a community mainly agricultural, the property 
tax was not unsuited to the social conditions. But as soon as commercial 
and industrial considerations came to the foreground in national or 
municipal life, the property tax decayed, became a shadow of its former 
self and, while professing to be a tax on all property, ultimately turned 
into a tax on real property. The disparity between facts and appearances, 
between practice and theory, almost everywhere became so evident and 
engendered such misery, that the property tax was gradually relegated to a 
subordinate position in the fiscal system, and was at last completely abol- 
ished. All attempts to stem the current and to prolong the tax by a 
more stringent administration had no effect but that of injurious reac- 
tion on the morale of the community. America is today the only great 
nation deaf to the warnings of history. But it is fast nearing the stage 
where it, too, will have to submit to the inevitable. 

Failure in the United States 

The personal property tax has had a fair trial in nearly every 
State in the Union, and has everywhere proved a failure. This 
is the practically unanimous verdict of the many able commis- 
sions that have made a careful study of the tax in the various 

1 Report of the Joint Legislative Committee on Taxation of the State 
of New York. 19 14. p. 31-54. 



226 SELECTED ARTICLES 

states. To quote from all of these reports, however impressive 
the evidence would be, would be merely cumulative. We give 
therefore, but brief extracts from five of the most important, 
which may fairly be said to be typical and representative. 

Report of the Commission on Taxation, Massachusetts, 
1908, Pages 22-24, 25, 26-28, 33-34 

This method of taxation is frequently described as peculiarly 
American and democratic, and it is supposed to be a method 
which, if fully carried out, would oblige every man to contribute 
to the support of public charges in proportion to his ability to 
pay. But, as a matter of fact, the system is neither distinctively 
American nor democratic, and it is admitted that, however ex- 
cellent the intent of the law, the practical result has never been 
that all citizens do contribute in proportion to their ability to 
bear the charges of government. 

The general property tax was once in nearly universal use 
in Europe, and was brought to Massachusetts by the early 
settlers, who merely introduced here a system with which they 
had been familiar in the country from which they came. In Eng- 
land, as in most other countries of Europe, the principal form 
tof direct taxation had long been a general levy upon property. 
In the seventeenth century this tax was known as the subsidy, 
and in practical operation produced the same results as followed 
its introduction in the New World. Personal property always 
managed to escape taxation in whole or in part, so that com- 
plaints about the inequality and injustice of the system were 
almost as common as they are in Massachusetts in our own time. 
In 1592 one writer stated that not more than five men in Lon- 
don were assessed upon goods exceeding £200, and in 1601 Sir 
Walter Raleigh complained that "The poor man pays as much 
as the rich." About the middle of the seventeenth century the 
subsidy became so unsatisfactory that it was replaced by a new 
tax, known as the monthly assessment, which was, however, but 
the same thing under another name. The immediate result of 
the change was a somewhat more complete assessment of prop- 
erty; but before long personalty began to evade taxation as be- 
fore; so that in 1692 the monthly assessment was abolished, 
and replaced by a new tax designed to reach the true yearly 
value of all lands, tenements, offices and personal estates. This 



TAXATION 227 

new tax was but another property tax in a somewhat different 
form, and it soon fared as badly as its predecessors. During the 
eighteenth century personal property disappeared from the as- 
sessment rolls as rapidly as ever before, so that by 1798 over 
nine-tenths of the levy fell upon real estate, and less than one- 
tenth upon offices and personal estate. By this time, in fact, the 
tax had generally come to be known as the "land tax." In some 
towns, we are told, the whole tax was assessed upon land and 
houses and personal estates wholly escaped. 

In 1798 an act was passed by which the land tax became 
virtually a fixed charge upon the land, and since that time no 
further attempt has been made in England to levy a general 
property tax. The national revenues are now derived from an 
income tax, taxes on inheritances and the usual indirect taxes ; 
while local revenues are drawn chiefly from a tax levied upon 
occupiers of land, houses and trade premises. 

And in most of the other countries of Europe the result has 
been the same. . . 

It is equally erroneous to call the general property tax a dem- 
ocratic form of taxation. It is not found in such ultra-demo- 
cratic communities as the Australasian States ; nor, with the ex- 
ception of Switzerland, is it found in those countries of Europe 
in which democratic ideas have taken deepest root. It was 
brought to America from England in the seventeenth century, 
when democracy existed neither in the mother country nor the 
'colonies, and has been fastened upon us rather by historical ac- 
cident than because of its inherently democratic qualities. . . 

The history of the general property tax in Massachusetts is 
not materially different from its history in other states. From 
165 1 to the present date complaints that personal property evades 
taxation are met at every hand. During the last thirty-five years 
four commissions or special committees, exclusive of the present, 
have been appointed to study the question ; and their reports dis- 
close the fact that the taxation of intangible property is the 
weakest point in the entire system. There is reason to believe 
that the administration of the law by Massachusetts assessors 
has been considerably better than the administration of the laws 
of many other states. The taxation of intangible property has 
not been such a complete farce with us as it has been elsewhere ; 
yet we find no one who supposes that we are now taxing more 



228 SELECTED ARTICLES 

than 10 or 20 per cent of the money, credits and securities tax- 
able under our present law. After careful study of the subject, 
our commission is forced to the same conclusion that was 
reached by the commission of 1897, which we reproduce here: 

It is obvious, however, that this method of taxation encounters, as 
to intangible property, exceptional and indeed almost insuperable dif- 
ficulties. There are no such external indications of taxable liability as 
appear in the case of live stock, vessels, stock in trade or machinery. Gen- 
eral repute as to the possession of large means, or a mode of life indi- 
cating an ample income, do not necessarily signify anything as to tax- 
able securities. The investments of a person of means may be in real 
estate within or without the State, or in Massachusetts stocks or mort- 
gages, or in bonds of the United States. An ample income, indicated by 
general expenditure, may be derived either from such sources already 
taxed or not taxable, or from trade and profession, or from taxable se- 
curities, — these last two being taxable, but taxable at very different rates. 
The assessors hence must rely on their knowledge and judgment in esti- 
mating the taxable property of this form. In a great and complicated so- 
ciety, with a mass of investments ramifying in all directions the assessors 
are here confronted with a task which the best of them could not execute 
satisfactorily. Even the most capable, most experienced and most con- 
scientious assessors could not have sufficient knowledge and judgment. 
But only average capacity can be expected; experience is often lacking; 
and, even for conscientious assessors, the temptations to laxity are in 
many cases irresistible. Consequently, the taxation of this form of prop- 
erty is in high degree uncertain, irregular and unsatisfactory. It rests 
mainly on guess-work; it is blind, and therefore unequal. Here is its 
greatest evil, though not its only evil. It is haphazard in its practical 
working, and hence demoralizing alike to taxpayers and to tax officials. 

Report of Maryland Commission, 1888, Pages 101, 103, 151 

The truth is, the existing system is so radically bad, that 
the more you improve it the worse it becomes. This lies in the 
nature of things and nothing any Legislature can do can alter 
this condition of things. Experience and reason alike teach this, 
and in my opinion place it beyond controversy for all those who 
have eyes to see what is passing about them every day of their 
lives. 

The reason why our present system of taxation does not 
operate satisfactorily can be stated in a word; although it is on 
the face of it fair and simple, it is found in practice to be an 
impracticable theory, for a large portion of property escapes tax- 
ation, and that the property of those best able to bear the burdens 
of government, namely, the wealthy residents of cities. On the 
one hand, it is impossible to find this property, and to force men 
to make returns under oath, results invariably in perjury and 
demoralization, without discovery of property; on the other 
hand, federal laws over which our States and municipalities 
have no control, enable many to escape taxation by investments, 
often temporary, in federal bonds, exempt from taxation. 



TAXATION 229 

Personal property is sometimes discovered in its entirety, 
but it is then nearly always the property of the comparatively 
helpless, namely, widows and orphans, whose possessions are a 
matter of public record. Less often a burden is imposed upon 
the conscientious. Thus, I happen to know of one wealthy 
town of a few thousand inhabitants, where three men of con- 
scientious convictions with regard to a man's duty to the com- 
monwealth, pay taxes on their personalty, although they have 
as good an opportunity to escape as others. This state of 
things naturally produces dissatisfaction on the part of farmers 
and other hard working people, who feel that personalty ought 
to bear a share of the burden of taxation. On this account 
they suggest various things, like taxation of mortgages, and a 
more vigorous search for hidden property. Their aim, as I 
have said, is commendable, but to attempt to reach the desired 
goal by direct means, under existing laws, or any laws which 
do not imply a change of the system of taxation, is as Utopian 
as the dream of the most radical socialist. If we desire to 
accomplish a purpose we must use means adequate to the end 
in view. . . 

Another aspect of this case is presented by the facts of com- 
petition in business. Those who escape the payment of a fair 
share of business taxes have an advantage in business which en- 
ables them to undersell their competitors, and when a business 
man sees ruin staring him in the face because his dishonest 
neighbor makes false returns and pays taxes on only a frac- 
tional part of his property, the temptation to do likewise is 
almost irresistible, except for moral heroes, and moral heroism 
cannot be made the basis of governmental action. 

Report of Kentucky Special Commission, 1912, Pages 83-4 

In 1904 the total roll was $630,795,464, and monies, credits 
and securities were assessed at $68,829,446, or 10.9 per cent. 

In 191 1 the total roll was $846,450,020, and monies, credits 
and securities were assessed at $83,468,030, or 9.8 per cent. 

In 1906 the ratio was 10.8 per cent. 

In 1907 the ratio was 11.5 per cent. 

In 1908 the ratio was 10. 1 per cent. 

In 1910 the ratio was 9.5 per cent. 

As we said in our preliminary report : The state of Ken- 
tucky received more revenue for the year 1912 from its dogs 
than it did from all the bonds, monies and stocks in the state. 



230 SELECTED ARTICLES 

When finally we note that money, credits and securities 
taxed in iqio, the year of the census, were $79,000,000 or only 
$34 per capita, the necessity for further research seems to 
disappear. 

Nobody can seriously maintain that all monies, credits and 
securities are taxed or any substantial part. 

In the opinion of the Commission, the present methods of 
taxing money and credits are ineffective in producing revenue 
and highly unjust in their operation on individual taxpayers. 
They constitute one of the gravest problems connected with our 
system of taxation, and until they are changed our tax laws will 
remain vitally and fundamentally defective. 

Report of Virginia Tax Commission, 191 1, Pages 69-/0 

To summarize, it has appeared that inequalities and under- 
valuations of every sort appear in our taxation of personal 
property. How extensive these are can only be surmised; how 
iniquitous they are can merely be imagined. Viewing the situ- 
ation as a whole, the writer believes that it would be better to 
remove the tax on personal property altogether and seek other 
sources of revenue, than to perpetuate the frauds, inequalities 
and under-valuations which now encumber the administration of 
our tax laws. 

A law which permits these things is unquestionably a failure, 
and it behooves those interested in the problem to ascertain why 
and wherein the law has broken down. Examination has shown 
that the failure of the property tax in Virginia may be traced 
to four things. These are, first, the attempted enforcement of a 
law under industrial conditions which render it inoperative of 
necessity and invalidate the theory upon which it is based; 
second, the failure of many commissioners of the revenue to en- 
force the existing laws; third, certain defects in the law which 
make deceit and injustice easy; fourth, the growth of a feeling 
among our people that there is nothing dishonorable or dis- 
creditable in "dodging taxes." 

Report of National Tax Association, Vol IV, Pages 309-10 

To sum up, your committee finds : 

That the general property tax system has broken down; 
That it has not been more successful under strict administra- 
tion than where the administration is lax; 



TAXATION 231 

That in the states where its administration has been the most 
stringent, the tendency of public opinion and legislation is not 
toward still more stringent administration, but toward a mod- 
ification of the system; 

That the same tendency is evident in the states where the 
administration has been more lax ; 

That the states which have modified or abandoned the gen- 
eral property tax show no intention of returning to it ; 

That in the states where the general property tax is required 
by constitutional provisions, there is a growing demand for the 
repeal of such provisions. 

We conclude, therefore, that the failure of the general prop- 
erty tax is due to the inherent defects of the theory; 

That even measurably fair and effective administration is 
unattainable; and that all attempts to strengthen such adminis- 
tration serve simply to accentuate and to prolong the inequalities 
and unjust operation of the system. 

Summary of Reports of New York Commissions 

The New York authorities are all to the same effect. 

A more unequal, unjust, and partial system for taxation 
could not well be devised. (First Annual Report of the State 
Assessors, i860, p. 12.) 

The defects of our system are too glaring and operate too 
oppressively to be longer tolerated. (Comptroller's Report, 

I859-) 

The burdens are so heavy and inequalities so gross as almost 
to paralyze and dishearten the people. (Assessor's Report, 1873, 

P. 3.) 

The absolute inefficiency of the old rickety statutes passed in 
a bygone generation is patent to all. (Assessor's Report, 1877, 

P. 5-) 

The hope of obtaining satisfactory results from the present 
broken, shattered, leaky laws, is vain. (Report Association of 
Taxes and Assessments, 1876, p. 52.) 

The system is a farce, sham, humbug. (Assessor's Report 
1879, P. 23.) 

The present result is a travesty upon our taxing system, which 
aims to be equal and just. (Comptroller's Report, 1889, p. 34.) 

The general property tax is a reproach to the state, an out- 
rage upon the people, a disgrace to the civilization of the nine- 
teenth century, and worthy only of an age of mental and moral 



232 SELECTED ARTICLES 

darkness and degradation when the only equal rights were those 
of the equal robber. (Comptroller's Report, 1889, p. 34.) The 
above quotations from the New York reports are taken from 
Seligman's Essays in Taxation. 

Report of 1872 

The report of the Commission of 1872, of which Mr. David A. 
Wells was chairman, was one of the ablest tax reports ever writ- 
ten. We, therefore, quote from it at some length : 

In the case of New York, no one, either officials or citizens, is satisfied 
with the existing system or its administration; and so apparent, more- 
over, are its defects, that the necessity of reform is almost universally 
acknowledged. But the Commissioners who have made the system a 
matter of special study and inquiry, go further, and unqualifiedly assert 
that, as it exists today it is more imperfect in theory and defective in 
administration than almost any system that has ever existed, and that its 
longer recognition and continuance is alike prejudicial to the material in- 
terest of the state and the morality of its people. 

Real property being visible and tangible, presents no inherent difficulty 
in the way of assessment, and the system might be reasonably supposed to 
work with some degree of uniformity and equality, yet they found it 
impossible to find any two contiguous towns, cities or counties in which 
the valuation of real estate approximates in any degree to uniformity. 

It is evident that the law in this respect has become a dead letter 
and wholly inoperative. The attempts to tax personal property under the 
same system are infinitely more farcical and disgraceful. 

The reasons for the failure are as follows : 

In the first place, a large part of personal property "is incorporeal 
and invisible, easy of transfer and concealment, not admitting of valuation 
by comparison with any common standard, and the situs or locality of 
which for purposes of assessment and taxation, involves some of the oldest, 
most controverted and yet unsettled questions of law. . . It is obvious, 
therefore, that the law contemplates the doing of an act . . . which 
cannot be done without the fullest cooperation through communication 
of information of the taxpayer himself; and yet for the imparting of 
which the two most powerful influences that can control human action, 
viz., love of gain and the desire to avoid publicity in respect to one's 
private affairs, cooperate to oppose." 

Report of 1893 

The taxation of personal property is "unsatisfactory and un- 
just, and if no better plan of administration be devised and 
carried into effect than that now in existence, it is idle and 
worse than useless to attempt the taxation of personalty, how- 
ever objectionable the alternative." (Report of Counsel to 
Revise the Tax Laws of the state of New York, 1893.) 

Report of 1900 

The Joint Committee on Taxation for the year 1900 likewise 
found that the personal property tax was a failure, and did not 
believe any reform would remedy the situation unless the listing 



TAXATION 233 

system were adopted. This, however, the committee was un- 
willing to recommend. It found that while the first returns were 
apparently good under the listing system, it eventually drove 
capital out of the state. 

Report of 1907 

The principal difficulty connected with our system of local 
revenue is the taxation of personal property. . . It is a 
universally accepted maxim that direct taxation of the citizen 
should be as nearly as possible in proportion to his ability to pay. 
The actual situation in New York involves in practice the very 
inverse of this principle. 

As a result of its study the committee concluded : 

1. That there has been gradual and steady increase in the 
value of real and personal property; 

2. That personal property escapes paying its share of the 
burden; 

3. That the greater the amount of personal property placed 
on the rolls, the larger the cancellations or reductions ; 

4. That the burden falls heaviest on the residents of our 
state and the smaller taxpayer : 

5. That the non-residents have almost ceased to pay taxes ; 

6. That the collection of the personal property tax has be- 
come more and more difficult. 

Causes of the Failure of the Personal Property Tax 

Briefly stated, the objections to the personal property tax and 
the reasons for its failure arc as follows : 

1. Inequality of assessments. 

a. As between towns. It is notorious, and the facts to be 
submitted later will show beyond question, that in some towns 
personal property is assessed at something like true values, 
whereas in others no attempt whatsoever is made to reach the 
personal property of either corporations or individuals, or if it 
is reached, it is assessed at a value insignificant as compared 
with true value. This has a tendency to produce throughout the 
state "isles of safety" or residential districts desirable from a 
tax standpoint for both individuals and corporations who, by 
establishing a nominal residence, and by the payment of a small 
or nominal tax, in one town, are enabled to escape their propor- 
tion of the taxes in the town in which they actually reside. 
Thus, the one town is enabled to increase its tax base and lower 



234 SELECTED ARTICLES * 

its rate, while the other is deprived of large amounts of taxable 
property and is obliged to tax that which remains within its 
jurisdiction at a higher rate. 

b. As between citizens of the same town. The system is 
practically one of self-assessment, under which the dishonest 
man who is willing to swear off his taxes, does so at the ex- 
pense of the honest man whose conscience does not permit him 
to do so. 

2. The personal property tax at a general property rate, let 
us say 2 per cent, is confiscatory and an actual incentive to dis- 
honesty. Two per cent is the equivalent of 50 per cent of the 
income of a 4 per cent bond, and no country in the world in 
normal times has or can successfully impose a 50 per cent in- 
come tax. The taxpayer will not submit to it, particularly when 
he knows that thousands of fellow citizens, in many cases with 
incomes much larger than his own, are actually evading its pay- 
ment. 

3. The theory underlying the general property tax is that 
both real and personal property should be taxed at the same rate 
and on the same basis. Without at this time discussing the 
soundness of this particular theory, as a matter of practice, real 
estate bears practically the entire burden, while personal prop- 
erty, though theoretically liable, fails to contribute its share to 
the support of government. 

4. The deduction of debts invites fraud and evasion, yet not 
to allow deduction of debts is in some cases double taxation. 
As has been said, "Individuals should be taxed on what they 
own, not on what they owe." This, of course, is not true in the 
case of many corporations that obtain most of their working 
capital by issuing bonds. 

5. The personal property tax is unequal as between different 
grades of property. It falls with equal weight upon unproduc- 
tive property, on property yielding comparatively small income, 
and on property bringing in a very large return. 

6. Under modern conditions, property no longer represents 
the true test of ability to pay. In a simple agricultural com- 
munity, where personalty is for the most part tangible and 
visible, property furnishes a fairly equal measure of a man's 
ability to contribute to the support of government; but under 
modern business development this is by no means the case. 
Take the case of the merchant with a large turnover and a com- 



TAXATION 235 

paratively low profit. His ability to pay taxes is by no means 
the equal of that of the merchant with a small stock of goods, 
a rapid turnover and large profits ; yet under the personal prop- 
erty tax the former rather than the latter will pay the larger tax. 
Take the case of the manufacturer. The one may own a very 
large plant with complicated, expensive machinery, and the 
necessities of his business may require him to carry a large in- 
ventory. He may earn but a small return on his investment. 
Another manufacturer in another line may have a smaller plant, 
much less valuable machinery, a comparatively light inventory, 
and yet because of the nature of his business may have a 
greater income. Here again the ability of the latter to contribute 
is greater than that of the former, yet the former under the per- 
sonal property tax pays the heavier share. As between individ- 
uals, the lawyer earning $50,000 a year pays nothing on the tax- 
able ability represented by these large earnings, while the widow 
or the retired business man or wage-earner with $500 a year de- 
rived from accumulated savings of $10,000 is compelled to turn 
over $200 of it to the tax gatherer. The investor who makes an 
unwise investment from which he gets little or no return pays 
as much as the fortunate individual enjoying fat dividends; the 
man with a large unearned income and extravagant habits gets 
off scotfree. while the thrifty one who in spite of a lower earn- 
ing capacity and less ability to pay taxes manages to lay some- 
thing aside is taxed on the evidences of his thrift. 

7. Personal property under modern conditions consists for 
the most part of securities, credits and other intangibles, easy 
of concealment and which cannot be discovered without the co- 
operation of the taxpayer himself — a cooperation which the tax- 
payer declines to furnish, and which experience has demon- 
strated cannot be compelled. Moreover, the large accumulations 
of wealth in form of intangibles are usually concentrated in the 
great cities under conditions which make it well-nigh impossible 
for the assessors to locate the owners — a complete change from 
the conditions under which the personal property tax was 
adopted, when life was simple, wealth fairly equally distributed, 
when people lived in villages or small towns, and when each man 
knew not only what his neighbor owned, but what property of 
his was assessed. Even in so far as tangible personalty is con- 
cerned, consider the difficulty which confronts the average as- 
sessor who may be required to assess accurately anything from 



236 SELECTED ARTICLES 

a Rembrandt picture to a large modern industrial plant. The 
fact is that, at the wages paid — which in many instances do not 
exceed $3 a day — it is impossible to obtain any man with a suffi- 
cient accumulation of knowledge to enable him to deal success- 
fully with a field so wide as to include within its range practically 
every form of property found in a complicated society. 

8. The great number of exempt securities makes it possible 
for the wise investor lawfully to escape personal property taxa- 
tion, leaving the tax to fall on those not sufficiently fortunately 
situated to obtain wise legal advice and on those ignorant of the 
law. 

Injustice of the Personal Property Tax- 
All semblance of justice and equity has long since left the 
personal property tax, which has been suffered to remain on our 
statute books because of the widespread apathy and ignorance 
of the public in regard to taxation, and because of the fact that 
it has not, generally speaking, been enforced. 

1. As between tangible and intangible personalty. Tangible 
property can be seen ; intangible property cannot be seen. Tax 
assessors find it comparatively easy, therefore, to discover tang- 
ible property, while they have the greatest difficulty in locating 
intangible property. Everywhere the result is the same — not only 
is a much larger proportion of tangible property reached for 
the purposes of taxation, but that proportion reached bears a 
much higher rate of taxation as a result of the escape of 
intangibles. 

The inequity is further accentuated by the fact that those 
most able to pay have their wealth largely invested in intangibles 
and that those least able to pay have their wealth largely invested 
in tangibles. The magnitude of this injustice will appear as we 
examine the effect of this tax upon the rich as compared to the 
poor, upon the widows and orphans, upon the farmers as com- 
pared with owners of other forms of wealth and upon the strug- 
gling business as compared to the well-established business. In 
every case the inequity increases with the inability of the par- 
ticular classes to bear taxes. 

2. As between the poor and the wealthy. Not only do the 
poor and those in only moderate circumstances have their wealth 
invested in easily seen and easily taxed tangibles, but the kind 
of tangible personalty in which the poor man invests his money, 



TAXATION 237 

whether it be in his household effects or in his small business, 
is of such nature that the ordinary tax assessor is familiar with 
it and can therefore assess at well-nigh its true value. This is 
true as well of the tangible personalty that makes up the small 
business concern as of the tangible personalty included in the 
household goods and other personal effects. In the case of the 
wealthy man, however, the case is a very different one. Not 
only is a large part of his wealth ordinarily invested in intang- 
ibles, but much of his tangible personalty, whether that of his 
personal effects or that of his business, is of a kind that the 
ordinary assessor (in his daily life) is unfamiliar with, and it is 
also of a kind that is difficult of valuation. This is true not only 
of the wealthy individual but of the wealthy corporation as well. 
In regard to the former, the valuation of such property as 
jewelry, works of art, books, etc., require a knowledge and skill 
not possessed by the average assessor. In regard to the rich 
corporations, such as mercantile corporations, carrying large 
stocks of fine fabrics, jewelry, etc., and those manufacturing 
corporations having machinery of great value as well as large 
stocks of products in the process of manufacture, the experience 
of forty-eight states of the Union discloses with unmistakable 
clearness that the average assessor does not and cannot assess 
these subjects with any degree of fairness. 

When we come to investment in securities, a large investor 
usually has the knowledge, or can obtain such advice, as will 
enable him to invest in tax-exempt securities, while the small 
investors, particularly women, are apt, through ignorance, to 
invest in taxable bonds. 

3. Concerning widows and orphans and trust estates. If 
there is one group of property which should escape with reason- 
able taxation, it would seem to be that property the income from 
which is set aside for the support and education of those who 
have been deprived through death of the head of the family, 
viz., the widows and the orphans. When the chief bread-winner 
dies, a record of his property must be filed in the probate court, 
where it is easily accessible to the tax assessors. Here it is 
caught and taxed, while similar property held by others is un- 
taxed. Were it taxed at only a fair rate, it would still be ques- 
tionable whether this property ought not to be partially exempt. 
However, it is not taxed at a fair rate, but at a rate which makes 
the personal property tax in this case one of the most barbarous 



238 SELECTED ARTICLES 

to be found in any country. Cases are frequent where as high 
as 25 to 50 per cent of the total income set aside for the support 
of widows and orphans is taken by this tax. How serious the 
situation is was well exemplified by investigation made by one 
of the witnesses who appeared before the Committee. He stated 
that he found that in one county (not in the state of New 
York) the roll showed that about 20 to 25 per cent of the per- 
sonal property taxes were paid by women. It will, of course, be 
readily agreed that women do not own anything like 25 per cent 
of personal property in any state. Another witness told us of a 
woman whose husband had died leaving an estate all invested in 
4 per cent bonds. The woman was assessed by New York City's 
Tax Department for the full value of the bonds. There was no 
possibility of getting the tax reduced. Counsel advised her to 
change her investments, but she refused to do that because her 
husband had made them, so she was obliged to leave the city 
and change her residence. 

A simple example will illustrate how this tax works. Assume 
that a prudent head of a family had been able to save $15,000 
which had been invested in municipal bonds yielding 4 per 
cent. The annual income to the widow would be $600. At a tax 
rate of 2 per cent on the value of this personal property, the 
widow would be compelled to surrender $300 to the tax authori- 
ties or one-half of her total income. In some localities tax rates 
have risen as high as 3 or 4 per cent and cases are not unknown 
where, had the tax law been enforced, the widow would have 
been deprived of her entire income. Indeed, cases are known 
where the tax has not only absorbed all of the income, but has 
compelled the owner to pay an additional amount. In the 1915 
New York Tax Conference, Mr. Lawson Purdy cited such a 
case. Before the December, 1915, hearings of the Joint Legis- 
lative Committee on Taxation, Professor Charles J. Bullock of 
Harvard University testified that cases of such gross injustice 
amounting to the taking of from one-third to one-half of the in- 
come of widows and orphans were not infrequent where the 
general property rate was applied to personalty. Upon this 
point, the Report of the Massachusetts Tax Commission for 1908 
speaks as follows : 

The situation is made worse by the fact that the local tax rates 
throughout the country are so high that they take from the holder of 
good securities an excessive proportion of his income. According to the 
United States census, the average rate levied upon property assessed for 



TAXATION 239 

local taxation in the United States in 1902 was about 2 per cent of the 
capital value thereof, or as tax rates are usually reckoned in Massachusetts, 
$20 on each $1,000 of the assessed valuation. In many places real estate 
was so far undervalued that a tax of 2 per cent upon the assessed value 
may not have amounted to more than 1 per cent or even % of 1 per cent 
of the true value of the property. But personal property, if returned 
for taxation, must be valued usually at its true cash value; and it is 
clear that a tax rate of 2 per cent may take from the holder one-third 
or one-half of his income. Under such circumstances few persons can 
or will make returns of their personal estates; and the usual result is 
that this property is taxed by the method of arbitrary estimate, or "doom- 
age." When returns are made they come usually from trustees and exec- 
utors of small estates, who cannot easily evade the law, and have less 
inducement to do so. Thus it comes about that the tax on personal prop- 
erty bears with exceptional severity upon widows and orphans, the most 
helpless class in the community, and is most easily evaded by the rich 
and powerful, who can best afford to pay it. Instances have come to 
the attention of members of the present Commission in which widows are 
paying upon small estates taxes that take as much as 40 or 50 per cent 
of the income; whereas in the same communities men whose taxable prop- 
erty would probably amount to millions are paying a few hundred dol- 
lars of personal taxes upon merely nominal assessments. These condi- 
tions are not peculiar to Massachusetts — they have been repeatedly dis- 
closed by the reports of tax commissions in other states; and among 
students of American taxation it has become a mere truism that our 
present taxes upon personal property actually fall upon the taxpayers in 
inverse proportion to their ability to pay. 

4. As between farms and other forms of wealth. That 
the farmers bear a disproportionate share of taxation is gen- 
erally known and accepted by most of the informed throughout 
the United States. It is not generally known by the farmers or 
the public at large, however, to what an extreme degree this 
disproportion is carried. It is, of course, well known that most 
of a farmer's personalty is in a tangible form, and that it 
cannot be hidden from the tax assessor. Wherever the law is 
enforced the farmers' machinery and implements, his stock and 
other tangibles not only pay a much higher rate than their share, 
but a rate out of all proportion to the earning power of such 
property. This disproportionate rate is, of course, largely made 
up of that part of the tax burden that is evaded by other forms 
of wealth. The full significance of this inequity cannot be 
grasped without comparing the rates upon agricultural property 
and income with that of the other principal industries of the 
state. 

A study of California in this regard is of much value to New 
York. A few years ago a very careful investigation was made 
of the relative tax burdens borne by the various classes of 
wealth in California, and the results of this investigation were 
set forth in the 1906 California Tax report. Most of the 
statistics given immediately below are either copied from that 



240 SELECTED ARTICLES 

report or represent computations based upon the data there set 
forth. The following table taken from page 68 of this report 
is a comparative statement of manufacturing industries and 
agriculture in respect to the capital investment, percentage of 
total capital value invested in realty and personalty, and per- 
centage of each taxed: 

Comparison of Taxes on Manufacturing and Farms in California 

Percentage of total capital 

Aggregates Manufac- Agricul- 

Manufactures Agriculture tures ture 

Capital total $205,395,025 $796,527,955 100.0 100.0 

Land 34.735.4i6 630,444,960 16.9 79.0 

Buildings 22,562,385 77,468,000 11.0 9.7 

Machinery, resp. implements 62,440,759 21,311,670 30.4 2.7 

Other assets 85,656,465 67,303,325 4i-7 8.5 

Assessed value 63,500,000 474,731,497 31.0 65.0 

Taxes 1,049,932 9,030,000 .51 1.14 

Gross produce 302,874,761 131,690,606 147.0 16.5 

Net product 52,172,862 91,419,866 25.4 11.5 

Taxes of gross .346 6.86 

Taxes of net product 2.01 9.88 

This table discloses some very interesting facts; and these 
facts are of considerable interest to New York, because they 
illustrate a condition in California very similar to the one now 
prevailing in New York State. At least this is true in so far as 
they illustrate the inequity existing between farm property and 
that of other forms of wealth. It should be remembered, how- 
ever, that the actual inequity as between these two forms of 
wealth is probably greater in New York than in California. 

The above table shows that while agriculture pays 6.86 per 
cent of its gross product in taxes, manufactures pay only .34 
per cent or Yz of 1 per cent. In other words, measured in terms 
of gross product, the tax burden upon agriculture was about 
twenty times as heavy as that upon manufactures. In terms 
of net product, the disproportion, though not so extreme, is 
still very large. The table shows that while manufactures pay 
2.01 per cent of net products in taxes, agriculture pays 9.88 per 
cent in taxes. In other words, the tax burden measured in terms 
of net product is nearly five times upon agriculture what it is 
upon manufacture. It should be noted here that this statement 
is based upon the assumption that manufactures pay approx- 
imately 2 per cent of' net income in California. This rate is 
probably higher than that borne by manufactures in New York 
State. Statistics such as those gathered by the Federal Census 
indicate that the proportion borne by manufactures in New 



TAXATION 241 

York is less. These facts are brought out in more detail in 
part VIII of this report which deals with the taxation of 
manufacturing corporations. 

The following table summarizes the tax burdens borne by 
California farms: 

Per cent of taxes to true value 1 . 1 4 

Per cent of taxes to gross returns 6.86 

Per cent of taxes to net returns, including farmer's own compensa- 
tion and certain expenses 9.88 

The following tabulation compares the percentage of tax 
paid by farms and manufactures: 

Ratio of farm 

taxes to manufac- 

Farms Manufactures turing taxes 

Percentage paid on capital value 1.14% 1/2 of 1% 3 to 1 

Percentage paid on gross income 7.00% 1/3 of 1% 20 to 1 

Percentage paid on net income 10.00% 2% 5 to 1 

In regard to the comparative burdens borne by various kinds 
of wealth in New York State, no study similar to that of Cali- 
fornia has been made with the same degree of care and 
thoroughness. The New York problem is much more complex 
than that of California. The multiplicity of corporation taxes 
at varying rates and upon different bases makes the difficulties 
of a similar study for New York almost insurmountable. We 
have, however, sufficient data to justify a rough comparison 
between New York and California and between New York and 
states like Minnesota and Michigan that have also made studies 
similar to that of California. These comparisons all indicate 
that the disparity as between agriculture and other forms of 
wealth is even greater in New York. 

An examination of Minnesota's experience is pertinent. The 
following facts are gathered from the experience of Minnesota 
as it appears in the 1908 Report of the State Tax Commission 
of Minnesota (p. 54-5) : 

The special commission on revenue and taxation of 1906 ap- 
pointed by the governor of California declared that the per- 
centage of taxes to the gross products for manufactures in that 
state was .346, or about ^ of 1 per cent; for agriculture the 
relation of taxes to total product was 6.86 per cent. On the 
net product of manufactures the commission found the relation 
of taxes to be 2.01 per cent, and for agriculture 9.88 per cent. 
The basis of these figures is the United States census of 1900. 
Applying the same methods and the same data to Minnesota, a 



242 SELECTED ARTICLES 

somewhat different result is obtained. Expressed in the terms 
of product, the percentages of taxes to the returns secured 
from manufacturing and agriculture are as follows: 

Taxes to gross product — Manufacturing 3223% 

Taxes to gross product — Agriculture 4.7200% 

Taxes to net product — Manufacturing 2.0480% 

Taxes to net product — Agriculture 6.8850% 

Table Showing Comparison of Aggregates and Percentages of Invest- 
ments in Manufacture and Agriculture in Minnesota 

Aggregates Percentages 

Capital Items Manufactures Agriculture Manufactures Agriculture 

Land $29,548,954 $559, 301,900 17.810 70.90 

Buildings 19,850,136 110,220,415 11.980 13-97 

Machinery 37,953,943 30,099,230 22.886 3.83 

Other assets 78,479,213 89,063,097 47.324 n.30 



Total capital. .. .$165,832,246 $788,684,642 100.00 100.00 

The assessed value of manufactures was $32,509,514, and 
of agriculture $299,567,765. Reduced to percentages, the rela- 
tion of the assessment of manufactures to capital was 19.6 per 
cent, and of agriculture, 37.9 per cent. The manufactures paid 
$846,570 in taxes and agriculture $7,609,021 ; in other words, 
.51 per cent and .96 per cent, respectively, of their capital 
values. The gross product of the manufacturers of the State 
amounted to $262,655,881, or 158.3 per cent of the capital in- 
vested in manufactures, and the agricultural product was 
$161,217,304, or 20.4 per cent of the capital invested. In the 
case of the net product, the manufactures of the state earned 
$41,318,363, or 24.9 per cent on their capital, and agricultural 
interests $111,050,884, or 14.08 per cent. 

Manufacturers pay a little more than 2 per cent on their net 
product, and farmers pay more than three and one-third times as 
much as when measured on the same basis ; and on the basis of 
gross product the farmer pays more than eleven and one-half 
times the amount turned in by the manufacturer for taxes. On 
a net income basis the manufacturer pays 2 per cent of it for 
taxes, but the farmer pays nearly 7 per cent of his net income, 
which includes the benefits he receives from his garden, poultry, 
etc. And, further, the farmer's net income includes his reward 
for management as well as interest return. These items make 
the difference still more marked. 

These are eloquent figures. While the commission is not 
ready to accept them in their full meaning as conclusive, they do 
show clearly the general situation. 



TAXATION 243 

The experience of Michigan is also of much value, although 
the disparity between farms and manufactures is probably not so 
great as it is in the state of New York. The following table is 
taken from the 191 1 Report of the Commission of Inquiry into 
Taxation of Michigan (p. 9). 

It gives the rate of taxes per thousand of actual value for 
farms, banks, residence, railroads, manufacturing corporations, 
public service corporations and mines. It also gives a comparison 
of the value and taxes paid by each of these classes except 
residences: 

Rate 
Values Taxes per $1,000 

City real estate $14-85 

Farms $1,000,000,000 $10,000,000 10.00 

Banks and trust companies 75,000,000 1,250,000 17.00 

Railroads 212,000,000 4,378,000 20.65 

Sleeping car, express, car loaning 

and telephone and telegraph 

companies 24,000,000 493,000 20.67 

Manufactures 750,000,000 3,938,000 5.31 

Mines 250,000,000 1,750,000 7.00 

Electric railway, power, heat, light 

and gas companies ■ 130,000,000 900,000 7.00 

An examination of this table discloses the fact that manufac- 
tures bear the lowest rate of taxation of any class of wealth in 
Michigan, this rate being about one-fifth of that of the public 
service corporations, about one-half that of farm property and 
about one-third that of city real estate. This table is of value in 
so far as it throws light upon the disproportion of the tax 
burden. It should be clearly borne in mind, however, that the 
disproportion between manufactures and farms is very much 
less than in either California or New York. 

In view of the great inequality as between the actual assess- 
ment of farmers and manufacturers, it is of considerable interest 
to know whether any compensation is found in the difference in 
their tax-paying ability. The following quotation from page 66 
of the 1906 California Report is very clear upon this point: 

The same facts may be exhibited in another way. After allowing 
$2,446,238 for the average annual increase in value of farm property 
and taking 6 per cent as interest on the value of farm property, the 
census estimates that the 145,801 persons engaged in agriculture earned 
an average of $499.70 in 1899. The 113,155 persons engaged in manu- 
factures earned an average of $870. 

It would seem, then, that from the per capita earnings manufacturers 
could afford to pay nearly 75 per cent more taxes than could the farmers. 
As a matter of fact, however, the farmers pay 10 per cent of their net 
earnings and manufacturers only 2 per cent of their net earnings. 



244 SELECTED ARTICLES 

The present personal property tax works a severe hardship 
upon the property of farmers, irrespective of whether the tax is 
rigidly enforced or not. If the tax is actually enforced upon 
the personalty of farmers it obviously lays a highly dispropor- 
tionate burden upon that part of the farmer's wealth. In an- 
swer to this statement it is often said that the personal property 
tax does not discriminate against the farmer inasmuch as the 
average assessor does not actually assess any considerable 
amount of the tangible personalty found upon farms. It is true 
that to the extent that an individual farmer is underassessed 
by the local tax officer he escapes a certain part of a highly 
disproportionate burden. It is utterly fallacious, however, to 
infer that in escaping to this extent the farmer is freed from 
the inequities of the personal property tax. The greatest in- 
justice to the farmer arises from the indirect results of the 
almost complete failure of the general property tax as applied 
to personalty in general. When practically one-half of the 
tax base escapes in the form of personalty, the rate upon the 
remaining half must be double what the rate would be, were 
it levied uniformly upon the entire base. To the extent, there- 
fore, that anyone's wealth is composed of real estate, to just 
that extent does he bear an increased disproportionate share of 
the tax burden. 

A reference to the above tables from the California report 
is illuminating at this point. The first table shows that 79 per 
cent of the total value of agriculture is invested in land and that 
88.7 per cent is invested in land and buildings. Manufactures, 
on the other hand, have invested in land only 16.9 per cent of 
total capital and only 27.9 per cent in land and buildings. Per- 
sonalty of manufactures makes up 72.1 per cent, of which not 
less than 50 per cent is intangible. The significance of these 
figures must not be overlooked. They show not only that that 
part of the fair share of personalty escaping taxation is borne to 
a very large degree by agriculture, but that that particular bur- 
den is partly accounted for by the failure of the assessors to 
reach the very large per cent of the capital of manufacturing 
and other corporations that is represented by personalty. 

It must not be understood that manufactures represent the 
only group of wealth that shoves off part of its tax burden upon 
the farmer. The manufacturing industry has been used for pur- 
poses of illustration, and did space permit, it could be shown 



TAXATION 245 

that other business corporations as well as some of the public 
service and financial corporations fail to bear a tax burden 
proportionately as heavy as that of agriculture. 

In answer to the above arguments it is often said that the 
farmer suffers no injustice because as his tax burden increases, 
the value of his land increases. Wherever the increase in value 
of this land assumes the form of the so-called "unearned incre- 
ment," this fact may be true in those particular cases in which 
the increment is as large as the tax increase. In those cases, 
however, where the increased value of the farm has been due 
to the labor and capital investment of the farmer, it cannot 
be truthfully said that the increased value "takes care of" the 
increase in the tax burden. In any case where the property has 
not increased in value, the increased burden is a heavy one. 

In summing up the case of the farmer, the evidence is well 
nigh overwhelming that the general property tax in so far as it 
pertains to personalty, directly or indirectly, imposes on him 
an increasingly disproportionate burden. 

5. Injustice as between various types and classes of enter- 
prises. As the personal property tax is now levied in New 
York, it constitutes not only a serious impediment to the 
development of some businesses, but a constant annoyance to 
many branches of business. It is unjust as between various 
units of business and types of corporations. It is unjust as 
between mercantile and manufacturing corporations and it is 
unfair to corporations within the same group. The extreme to 
which this unfairness is carried is illustrated by the ridiculous 
differences in the percentage of personalty assessment to total 
assessment in the same counties. In the same type of business, 
the ratio of personalty to realty sometimes varies from 1 to 2, to 
1 to 75. In the same town the personalty of manufactures 
escapes while the personalty of mercantile corporations is as- 
sessed. Moreover, local mercantile corporations are taxed upon 
personalty, while foreign corporations, doing large business next 
door and carrying large stocks of personalty, are taxed neither 
in the locality nor at their domicile. 

The unfairness as between manufacturing corporations of 
nearby competing towns is often very great. In fact the present 
investigation discloses the fact that in general throughout the 
state of New York the personal property tax bears to business 
the relation of an unmitigated nuisance. Were the law fully 
enforced, it would drive business out of New York: with 



246 SELECTED ARTICLES 

present sporadic enforcement it falls with inequality and in- 
justice. 

6. As between the various counties in New York State. 
Reference to the comparative statistical tables in the appendix 
will show with what wide difference personalty is actually 
assessed in the different counties of the state. When the direct 
state tax is levied, the inequalities in the assessment of real 
estate are partly remedied by equalization. With personalty, 
however, all inequalities remain, because the board of equalization 
does not equalize personal property, but accepts the returns of 
the various counties. Thus the more efficient the personal 
property tax is levied in any county, the higher the percentage 
of the direct state tax that county is required to pay. In 
other words, the present law penalizes every county in proportion 
to its efficiency in enforcing the law. 



THE PROPOSED PERSONAL INCOME TAX x 

The first decision reached by the committee was that in 
the proposed model system of state and local taxation there 
should be a personal tax levied with the exclusive view of 
carrying out the principle that every person having taxable 
ability should pay a direct tax to the government under which 
he is domiciled. There appeared to be four forms of personal 
taxation which have been employed for this purpose. 

The first of these is the poll tax. It is evident, however, 
from the nature of the case that this tax would be utterly in- 
adequate to accomplish the object in view, even if levied at 
graduated rates, as has sometimes been done in other coun- 
tries. It would be so unequal and so far inferior to the other 
forms of personal taxation that it cannot be deemed worthy of 
serious consideration. Whether, as a supplement to an ade- 
quate system of personal taxation, it might be desirable to 
retain the poll tax as a means of insuring some contribution 
from people owning no property and having small incomes, 
the committee preferred not to consider in this report. It has 
been our desire to confine ourselves to main issues, and not to 

1 From the Report of the committee appointed by the National Tax 
Association to prepare a plan of a model system of state and local taxa- 
tion, p. 10-19. 



TAXATION 247 

undertake to solve every minor problem of taxation. We, 
therefore, say nothing about the poll tax, except that it is in- 
adequate for the purpose that we have in view, and cannot be 
recommended as an important element in any system of state 
and local taxation. 

The second method of imposing the personal tax would be 
to levy a tax upon every man's net fortune, that is, upon the 
total of his assets in excess of his liabilities, without exemption 
of any kind of asset or exclusion of any liability. This would 
not mean a general property tax, but a net property tax such as 
is found in some countries in Europe. It would be a tax levied 
not upon property as such, but upon net fortune as a measure 
of the citizen's personal liability to contribute to the government 
under which he is domiciled. It would be entirely distinct from 
any tax that might be levied objectively upon property, as prop- 
erty, at the place of its situs, and would have to be levied exclu- 
sively upon the property owner at his place of domicile. "It 
would necessarily be levied at a moderate rate, perhaps $3 per 
$1000, which would correspond approximately to a 6 per cent 
income tax upon investments yielding 5 per cent. Although 
precedents may be found in other countries for such a personal 
tax levied upon net fortunes, the committee has concluded that 
it is not to be recommended for adoption in the United States. 
Such a tax would raise the difficult constitutional question of 
the right of a state to levy a tax even upon the net fortune of a 
citizen if that fortune included tangible property located in an- 
other commonwealth. It is, furthermore, foreign to American 
experience, and would certainly not lead us along the line of 
least resistance. Since the coming of the federal income tax, it 
is obvious that it is easier for the states, and more convenient 
for the taxpayers, to adopt income rather than net fortune as 
the measure of the obligation of the citizen to contribute to the 
government under which he lives. 

The third method of personal taxation is what may be called 
a presumptive income tax, that is, a tax levied upon persons ac- 
cording to certain external indicia which are taken to be satis- 
factory measures of taxable ability. House rent is the index 
commonly used in such presumptive income taxes, and a tax on 
rentals has been proposed in times past by special commissions 
in Massachusetts and New York. Such a tax would be com- 
paratively easy to administer, and would raise no difficult 



248 SELECTED ARTICLES 

constitutional questions. It would undoubtedly be better than an 
income tax or a tax on net fortunes if those taxes were badly ad- 
ministered. But the amount that a citizen pays for house rent 
is after all such a very imperfect and inadequate indication of 
his income or fortune that the committee is unwilling to recom- 
mend it to any state in which there is any reasonable expecta- 
tion that conditions are, or may presently become, favorable for 
the introduction of a better form of personal tax. It appears 
that in France, where the tax on rentals has been in continuous 
operation since the Revolution, there is so little correspondence 
between house rents and taxable ability that in the greater part 
of the communes the taxing officials disregard to a greater or 
less extent the letter of the law, and assess people according to 
what they appear able to pay. The committee finds, therefore, 
that the tax on rentals is not to be recommended except, per- 
haps, as a last resort in states where administrative and other 
conditions are unfavorable to the introduction of any better 
form of personal taxation. 

There remains a fourth form of personal taxation, the per- 
sonal income tax. By this is meant a tax levied upon persons 
with respect to their incomes which are taxed not objectively 
as incomes but as elements of determining the taxable ability of 
the persons who receive them. This tax is better fitted than 
any other to carry out the principle that every person having 
taxable ability shall make a reasonable contribution to the 
support of the government under which he lives. It is as fair 
in principle as any tax can be; under proper conditions, it can 
be well administered by an American state, as Wisconsin and 
Massachusetts have proved ; it is a form of taxation which 
meets with popular favor at the present time, and therefore 
seems to offer the line of least resistance. The committee, there- 
fore, is of the opinion that a personal income tax is the best 
method of enforcing the personal obligation of the citizen for 
the support of the government under which he lives, and recom- 
mends it as a constituent part of a model system of state and 
local taxation. 

While it is impossible in this report to describe the proposed 
taxes in every detail, it is essential that the committee should ex- 
plain at least in broad outlines the manner in which these taxes 
should be levied. In so doing it will be necessary to refer con- 
stantly to the general principles previously stated, and to adjust 



TAXATION 240 

the details of each tax in such a manner as to enable it to carry 
into effect logically and consistently the principle upon which it 
is based. 

Since the purpose of the personal income tax is to enforce 
the obligation of every citizen to the government under which 
he is domiciled, it is obvious that this tax must be levied only 
upon persons and in the states where they are domiciled. It is 
contrary to the theory of the tax that it should apply to the in- 
come from any business as such, or apply to the income of any 
property as such. The tax should be levied upon persons in re- 
spect of their entire net incomes, and should be collected only 
from persons and at places where they are domiciled. It should 
not be collected from business concerns, either incorporated or 
unincorporated, since such action would defeat the very purpose 
of the tax. 

At first thought this proposal will doubtless seem objection- 
able to many, who will ask why a state should not tax all in- 
comes derived from business or property located within its 
jurisdiction, irrespective of whether the recipients are residents 
or non-residents. And if the personal income tax were the only 
one proposed, the objection would be well grounded. The com- 
mittee, however, is under the necessity of reconciling the conflict- 
ing claims of the states, and of doing so in a manner that will 
avoid unjust double and triple taxation of interstate business 
and investments. We, therefore, propose as the only practicable 
remedy a system which comprises three taxes, each of which is 
designed to satisfy fully and fairly the legitimate claims of our 
several states. We are elsewhere providing methods by which 
property will be taxed where located and business will be taxed 
where it is carried on. At this point, we are dealing exclusively 
with a personal tax designed to enforce the right of our states 
to tax all persons domiciled within their jurisdictions; and we 
are merely insisting that, in enforcing this claim, the states shall 
act consistently, and shall confine personal taxation to persons 
and attempt to levy it only at the place of domicile. If the per- 
sonal income tax is levied in any other way, it will simply re- 
produce and perpetuate the old evil of unjust double taxation 
of interstate property and interstate business. 

The second detailed recommendation we have to make is 
that the personal income tax shall be levied in respect of the 
citizen's entire income from all sources. Under existing 



250 SELECTED ARTICLES 

constitutional limitations, of course, interest upon the bonds of 
the United States and the salaries of federal officials cannot 
be taxed by the states, but we recommend that all other sources 
of income be subject to the income tax without exception or 
qualification. We are aware that, under the unreasonable and 
unworkable requirements of the general property tax, it has 
appeared desirable in times past to exempt state and local bonds 
from taxation, to exempt real estate mortgages, and to grant 
various other exemptions. All such exemptions are inconsistent 
with the theory of the tax we here propose, and should be dis- 
continued as rapidly as the circumstances of each case permit. 
Against the policy which led to these exemptions under the 
general property tax we here offer no criticism. But we are 
now dealing with a tax which is designed to be a part of a 
new system of taxation, and it is evident that none of the 
considerations which led to the exemptions created under the 
general property tax are applicable to a personal income tax 
levied upon the principle we here advocate. The personal 
obligation of the citizen to contribute to the support of the 
government under which he lives should not be affected by the 
form his investments take, and to exempt any form of invest- 
ment can only bring about an unequal, and therefore an unjust 
distribution of this tax. Our reasoning applies, of course, to 
the exemption which agencies of the federal government now 
enjoy. But that is a matter which is beyond the control of 
the states, and for the purposes of this report it will be con- 
sidered a fixed datum which must be accepted. * 

Our third specific recommendation is that the personal in- 
come tax should be levied upon net income defined substan- 
tially as a good accountant would determine it. We submit 
no formal definition at this time, and content ourselves with 
referring to the provisions of the Wisconsin and the Massa- 
chusetts income taxes. Our recommendation means that oper- 
ating expenses and interest on indebtedness must be deducted, 
but we wish to call attention to the fact that the issue by the 
federal government of large amounts of bonds which are exempt 

1 We here follow the view that has long prevailed concerning existing 
restrictions on the taxing power of the states. In two recent cases (Peck 
v. Lowe and U.S. Glue Co. v. Oak Creek, 247 U.S.) the court has de- 
veloped a doctrine which may justify the belief that a net income tax, 
levied upon state officials along with all other persons, with respect to 
their entire net incomes, might not be held to be a tax upon agencies of 
the federal government, and therefore forbidden by federal decisions. 



TAXATION 251 

from local taxation will make it necessary for the states to 
limit the interest deduction to an amount proportional to the 
income which the taxpayer derives from taxable sources. This 
would mean that if a person derives half of his income from 
taxable sources and one-half from tax-exempt federal bonds, 
he should be permitted to deduct but one-half of the interest 
that he pays upon his indebtedness. Any other procedure will 
tend to make the personal income tax a farce in many cases and 
will give occasion for legitimate complaint. 

The fourth recommendation relates to the exemption of 
small incomes. The committee believes that the amount of in- 
come exempted from the personal income tax should not ex- 
ceed $600 for a single person and $1200 for a husband and 
wife, with a further exemption of $200 for each dependent 
up to a number not to exceed three. This would give us a 
maximum exemption of $1,800 for a family consisting of hus- 
band, wife, and three children or other dependents. We rec- 
ognize, however, that conditions may well differ in various 
states, and have decided to make no specific recommendations 
about the amount of the exemptions granted to persons hav- 
ing small incomes. We limit ourselves to the above statement 
of the maximum exemptions that should be granted and the 
further observation that, under a democratic form of govern- 
ment, it is desirable to exempt as few people as possible from 
the necessity of making a direct personal contribution toward 
support of the state. 1 

Our fifth recommendation is that the rate of the income tax 
shall be the same for all kinds of income, that is, that it shall 
not be differentiated according to the sources from which in- 
come is derived. If the tax stood by itself, a strong argument 
could be made for imposing a higher rate upon funded than 
upon unfunded incomes. But the tax is, in fact, designed to 
be part of a system of taxation in which there will be a tax 
upon tangible property. Under this system there will be heavier 
taxation of the sources from which funded incomes are derived ; 
and there will, therefore, be little if any ground for attempting 
to differentiate the rates of the personal income tax. Such 
differentiation, furthermore, would greatly complicate the 

1 For administrative convenience we recommend that, in order to mini- 
mize the number of very small tax bills, no person liable to pay an income 
tax shall be assessed for less than $1.00. 



252 SELECTED ARTICLES 

administration of the tax, and would lead to numerous difficulties. 
Upon all accounts, therefore, we recommend that there shall 
be no differentiation of the rate. 

In the sixth place, we recommend that the rates of taxation 
shall be progressive, the progression depending upon the amount 
of the taxpayer's net income. Concerning the precise schedule 
of rates, we offer certain general recommendations. The low- 
est rate should not be less than I per cent, and under present 
conditions we regard it as inexpedient for any state to impose 
a rate higher than 6 per cent. The classes of taxable income 
to which the various rates apply need not be smaller than 
$1,000, and probably should not be larger. It results from 
what has been said that if the exemption to a single person 
be placed at $600, we would recommend a tax of 1 per cent 
upon any amount of income between $600 and $1,600; a tax of 
2 per cent upon any amount of income between $1,600 and $2,600; 
a tax of 3 per cent upon any amount of income between $2,600 
and $3,600; a tax of 4 per cent upon any amount of income 
between $3,600 and $4,600 ; a tax of 5 per cent upon any amount 
of income between $4,600 and $5,600; and a tax of 6 per cent 
upon all income in excess of $5,600. We present these figures 
merely for the purpose of illustrating our preferences, and 
make no definite recommendation except that the rates of the 
personal income tax should be moderate, and should be, as nearly 
as practicable, uniform throughout the United States. 

Our seventh suggestion concerns the administration of the 
proposed tax. No argument can be needed by the National Tax 
Association to support our recommendation that the administra- 
tion of the personal income tax should be placed in the hands 
of state officials. This we regard as an indispensable condition 
for the successful operation of any state income tax, and we 
should be disinclined to recommend the adoption of an income 
tax by any commonwealth that is unwilling to turn over its ad- 
ministration to a well organized and properly equipped state 
department. Local administration of an income tax has never 
worked well, and in our opinion, never can operate satisfactorily. 
It is obvious, finally, that a state tax commission, or commis- 
sioner, is the proper agent to administer the proposed tax; and 
we desire to record our belief that satisfactory results are hardly 
to be expected if the administration is turned over to any other 
state officials. Upon this whole question of administration. 



TAXATION 253 

which is of the most vital importance, we are fortunate in being 
able to rely upon the authority of the opinions repeatedly ex- 
pressed by the conferences of the National Tax Association. 
We are glad also to point to the experience of Wisconsin and 
Massachusetts. 

Our eighth recommendation is that the personal income tax 
be collected from taxpayers, upon the basis of strictly enforced 
and controlled returns, and without any attempt to collect it at 
the source. Upon this point there might have been doubt several 
years ago. But the experience of Wisconsin and Massachusetts 
shows conclusively that, with good administration, a reasonable 
tax upon incomes can be collected in the manner we have recom- 
mended, with the general cooperation of the taxpayers and with 
the minimum amount of evasion. Collection at source presents 
serious administrative difficulties, imposes unwarranted burdens 
upon third parties in respect of transactions which strictly con- 
cern only the taxpayers and the government, and not infre- 
quently tends to shift the burden of the tax to the wrong should- 
ers. What we seek is a personal tax which shall not be shifted 
and shall bring home to the taxpayer, in the most direct possible 
form, his personal obligation for the support of the government 
under which he lives. Collection at the source is plainly incon- 
sistent with the purpose of such a tax. We recommend, how- 
ever, that in certain cases information at the source be required 
as is now done under the Massachusetts and Wisconsin income 
taxes. Such information is helpful to the administrative offi- 
cials, and does not alter the incidence or otherwise affect in- 
juriously the operation of a personal income tax. 

The only remaining point is that of the proper disposition 
of the proceeds of this tax. So far as our general plan of taxa- 
tion is concerned, it is immaterial whether the revenue from 
the personal income tax is retained in the state treasury, dis- 
tributed to the local political units, or divided between the state 
and local governments. It is probable, furthermore, that the 
same solution may not be advisable in every state. If the state 
should keep the entire revenue, then every section of the state 
would benefit to the extent that such revenue might reduce the 
direct state tax. Upon the other hand, if the revenue from the 
income tax is distributed wholly to the local units, as is now the 
case in Massachusetts, the lightening of local burdens tends to 
reduce the pressure of the direct state tax. It seems probable 



254 SELECTED ARTICLES 

that in most cases a division of the revenue would be considered 
preferable; and in such cases we suggest that the state gov- 
ernments might well retain a proportion corresponding to the 
proportion which state expenditures bear to the total of the state 
and local expenditures, and that the same principle should apply 
in determining the share received by each of the subordinate po- 
litical units. Thus in case state expenditures amount to one- 
fifth of the total, county expenditures to two-fifths, and mu- 
nicipal expenditures to two-fifths, the state should receive one- 
fifth of the revenue from the income tax, the counties two-fifths, 
and the municipalities two-fifths. Whether distribution to the 
local units should be made upon the basis of the amount of tax 
collected in each unit, or whether the tax should be distributed 
upon some other basis, is also immaterial to our general plan 
of taxation. In states where domiciliary changes occurring 
under the general property tax have not produced an unnatural 
concentration of wealth in certain localities, it will probably be 
best to distribute the revenue according to the domicile of the 
taxpayers. But where, as in Massachusetts, under the operation 
of the general property tax, wealth has been greatly concentrated 
in a few localities, such a method of distribution is obviously 
impossible and some other method must be found. In such a 
case, the income tax revenue might be utilized for a state school 
fund, or might be distributed among the localities according to 
the proportions in which they are required to contribute to the 
direct state tax. Since this entire question of distribution must 
be so largely affected by local conditions, the committee prefers 
to do no more than to offer these general suggestions. 

WHAT RIGID ENFORCEMENT WOULD MEAN 1 

Tax rates and valuations are determined by the demand for 
public revenue. Needs for public revenues in Illinois, as in 
all other states, are increasing constantly with the new demands 
which are being made upon government. 

To meet these demands under the present system, present 
rates must be increased and applied, generally, to increased 
valuation of property already taxed. With proper constitu- 

1 Civic Federation of Chicago. Taxation and Public Finance, p. 16-17. 



TAXATION 25s 

tional changes, revenues from new sources derived in an equit- 
able manner by methods worked out in other states, may be 
reasonably expected. This will tend not only to relieve from 
undue share of the prospective increase, property already taxed, 
but to equalize the future burdens between property which now 
pays heavily and property which pays little or frequently 
nothing. 

Rigid enforcement of the present system sometimes is urged 
by the superficially inclined as a cure for present inequalities; 
The following are a few of the developments which would 
attend a real attempt at rigid enforcement: 

i. Greatly increased and probably intensely centralized 
powers of assessment and an army of deputies working con- 
stantly throughout the year. 

2. Heavy penalties with provisions for rigid enforcement 
against delinquents. 

3. An inquisitorial drag-net by which the assessors would 
attempt to question every possible holder of intangible wealth. 

4. Persons having no taxable property would be put to the 
expense and inconvenience of establishing their innocence of 
criminally hiding property. 

5. Intangible property of every kind, regardless of income- 
producing ability, would have to pay taxes by value out of its 
net income. This would operate to create higher interest rates, 
necessitating greater profits from all real property and increasing 
rents and the cost of living. 

6. Money in bank would be. taxed at a rate so much higher 
than the rate of exchange that it would go to more favorable 
jurisdictions, creating financial stringency in Illinois, at least 
during the assessment period. Already this tendency has been 
observed in some parts of the state. 

7. Even if bank runs and bank closings did not result, the 
banks would be compelled to pay a higher rate of interest on 
deposits to make up for the tax rate, and this would increase 
the interest rate on all sorts of loans. 

8. A confiscatory tax rate even more than now would be a 
menace confronting every prospective investor in Illinois, and 
to many times the extent which it now deters new capital for 
purchase of existing tangible property from coming into this 
state, it would operate to depreciate all values of all intangible 



^$6 SELECTED ARTICLES 

property by diminishing the market for it. Other states would 
profit by the hegira of capital from Illinois, and this state 
would be retarded in its economic growth and development. 

9. Every stick of furniture, every wash-boiler, every pick 
and shovel and hammer and saw, would have to contribute its 
mite, regardless of petty annoyance— and frequent hardships 
— on the part of thousands of individuals, and of a cost of assess- 
ment and collection far exceeding the revenues derived. 

Industrialism — employer and employee alike — would be in- 
jured by a rigid enforcement of the present uniform property 
tax system, even if it were done in the most impartial manner 
possible. 



BRIEF EXCERPTS 

We have found that the general property tax is a failure, for 
purposes either of revenue or equality; that more than half of 
the total wealth of the state in tangible property alone escapes 
taxation ; that of intangible property, such as moneys, credits, 
stocks and bonds, subject to taxation under existing laws, not 
10 per cent perhaps not even 5 per cent is listed on the dupli- 
cates. Report of the Tax Commission to the Governor of Ohio 
1908. p. 33. 

Practically the general property tax, as actually admin- 
istered today, is, beyond all peradventure, the worst tax known 
to the civilized World. . . It puts a premium on dishonesty 
and debauches the public conscience. It reduces deception to a 
system and makes a science of knavery; it presses hardest on 
those least able to pay. It imposes double taxation on one and 
grants immunity to the next. In short, the general property tax 
is so flagrantly inequitable that its retention can be explained 
only through ignorance or inertia. Edwin R. A. Seligman. The 
General Property Tax. p. 52. 

One of the pertinent observations of the [Special State Tax] 
Commission [of California, 1905] is applicable perhaps to every 
state. It is on the steady increase of tax burdens. "The people 
continually demand more and more of the various branches of 
the Government and the burden upon the property holders 



TAXATION 257 

increases at a very rapid rate. . . The growth in the burden of 
taxation has been much more rapid than the growth in popu- 
lation." And figures are given showing the growth of popula- 
tion from i860 to be 4.3 fold, while taxation increased during the 
same period 9.2 fold. Therein lies the necessity of discovering 
new sources of revenue, and sources, too, that can be reached 
more certainly than the tax on personal property, particularly 
of intangible character. The Civic Federation of Chicago. A 
Summary of the Reports of Special State Tax Commissions, 
p. 10. 

A survey of the field of state income taxation shows that 
thirteen states have income tax laws in some form upon their 
statute books. The laws of West Virginia, Montana and Con- 
necticut provide for business taxes on the net income of corpor- 
ations only. The laws of Mississippi, Missouri, North Dakota 
and Delaware are so recent that practical results are not ascer- 
tainable at this time. New Mexico has made no attempt to apply 
her law which was repealed by the legislature in 1919, but the 
governor vetoed the repealing act. Virginia and North Carolina 
have laws which are a survival of Civil War acts and have not 
been prolific revenue producers. Oklahoma has a law with the 
specific exemption so high that the receipts are materially re- 
duced. New York, Massachusetts and Wisconsin have compre- 
hensive laws which have shown favorable results. Frank D. 
S trader. Proceedings National Tax Association, v. 13. 

Since about 1885 there has been a marked increase in state 
and local revenues throughout the country and in fact through- 
out the western world. This growth has been especially marked 
during the last dozen years. On every hand the complaint is 
made of the increasing burden of taxation. For a quarter of a 
century writers on public finance have called attention, some- 
times with alarm, to the growth of public expenditures. In the 
main, however, this increase is looked upon as a natural growth. 
The functions of government have been constantly widening; all 
the old services are continued ; new ones are constantly being 
undertaken; and new and old are being conducted on a higher 
plane than formerly. Citizens are no longer content with mere 
room and convenience, but demand something of elegance, in 
their public buildings. They are no longer satisfied that their 



258 SELECTED ARTICLES 

duty is performed toward the unfortunate wards of the state 
by providing them shelter and food, but feel impelled to make 
use of all the methods of modern science to remove their ab- 
normalities and restore them when possible to the usual paths 
of life. Report of the Special Commission on Revenue and Taxa- 
tion. Nebraska. 1914. p. 23. 

Income taxes in almost every imaginable form have been 
tried for many years in some of the eastern and southern states. 
The following is a rough summary of the periods for which in- 
come taxes, in some form or other, have been in force in twenty 
of the states, the colonial and statehood periods being combined : 

State From To 

Alabama 1844 1884 

Connecticut 1649 1819 

Delaware .... 1869 1871 

Florida 1845- 1855 

Georgia 1863 1866 

Kentucky (as to U. S. Bonds) 1867 1871 

Louisiana 1865 1910 

Maryland 1842 1850 

Massachusetts 1843 1910 

Missouri 1861 1866 

North Carolina 1849 1910 

Oklahoma 1908 1910 

Pennsylvania 1841 1871 

Rhode Island 1673 1750 (?) 

South Carolina 1838 1868 

" 1898 1910 

Tennessee (as to U. S. Bonds) 1883 1910 

Texas 1863 1871 

Vermont 1777 1782 

1778 1850 

Virginia 1843 1910 

West Virginia 1863 1864 

(Where the year 19 10 is given above, the intention is to state that 
the law is not yet repealed.) 

K. K. Kennan, Income Taxation, p. 209-10. 

The first of the modern state income tax laws was passed by 
the legislature of Wisconsin in 191 1. In this state the move- 
ment for an income tax received its first impetus in the very 
general dissatisfaction which had been aroused by the inequi- 
table operation of the property tax as applied to personal prop- 
erty. A constitutional amendment authorizing an income tax 
was adopted in 1908 by a large majority. A tentative measure 
was introduced in 1909 and adopted in 191 1. From the very 
outset the success of this measure was in such marked contrast 
with the earlier state experiences that a number of states have 



TAXATION 259 

since resorted to this form of taxation, though not all of them 
have seen fit to follow the Wisconsin law in its most distinctive 
features, that is, its administrative methods which, more than 
anything else have made it successful. 

The state income tax laws adopted since 191 1 have been the 
following, which is a complete list so far as the writer can dis- 
cover; West Virginia, Oklahoma, Connecticut, 1915; Massa- 
chusetts, 1916; Missouri, Delaware and Montana, 1917; New 
York, 1917 and 1919. Income taxes of the older sort are still in 
force in Virginia, North Carolina and Tennessee. 

The income tax laws of the past eight years may be grouped 
into two classes, on the basis of their scope. In one group are 
those laws which apply to incomes of every sort, as in Wiscon- 
sin and New York. The former state has one general income 
tax law, the latter has enacted separate acts for the taxation of 
individual and corporate incomes. The other group, comprising 
all other states having income tax laws, have applied these laws 
to a limited class of incomes. In Massachusetts, Oklahoma, 
Delaware and Missouri, the tax is levied on the income of in- 
dividuals only, and in Massachusetts the scope of the law is 
further confined to certain classes of individual income. West 
Virginia, Connecticut and Montana levy the tax upon corporate 
incomes only. Harley L. Lutz. Report of the Special Joint Taxa- 
tion Committee of the 83d Ohio General Assembly. 1919. 
P. 88 

The Special Joint Committee on Taxation and Retrenchment 
was instructed by joint resolution to investigate and report on 
the possibility and the methods of securing retrenchment in gov- 
ernmental expenditures, especially in the cities and counties. It 
was found that the running expenses of state and local gov- 
ernment in the state of New York for 1918 were $436,000,000. 
For 1920 the figure cannot be below $500,000,000, or approxi- 
mately $250 for the average family of five. It was also found 
that of this total the expenses of the Staie government were 17 
per cent, the remaining 83 per cent being the costs of city, vil- 
lage, town and county government. 

The causes for this marked increase in the costs of city gov- 
ernment in this State are : 

1. The very rapid increase in the appropriations devoted to 
education 



2 6o SELECTED ARTICLES 

2. The extension of government into new fields of activity, 
such as parks, playgrounds, nursing, Americanization, health 
education, etc. 

3. The need for extended city improvements partly to make 
up for the long period of inactivity during the World War and 
partly to meet the new standard of service and equipment de- 
manded of the city by the people. 

4. The expansion of municipal services, such as fire and 
police, to render more and better service in response to popu- 
lar demands. 

5. The "enthusiasm and desire of department heads to 
render greater service" and to expand their departments — as 
Mayor Stone of Syracuse put it. 

6. The change in the value of the dollar and the new price 
level, or as Mayor Wallin of Yonkers stated it: "You are 
going through a period of increased expenditures as expressed 
in dollars but not an actual increase when you consider the value 
of the dollar." 

7. Inappropriate and poorly functioning governmental organ- 
ization. 

8. Inefficiency and waste. Report of the Special Joint Com- 
mittee on Taxation and Retrenchment. New York. 1920. p. 15-16. 



AFFIRMATIVE DISCUSSION 



INCOME TAX * 

The taxation system of Michigan is based on an ad valorem 
general property tax, administered at a uniform rate, on all prop- 
erty not specifically taxed, or by law exempt. 

The individual who studies the taxation problems of Mich- 
igan with the statistics of recent years before him, cannot fail 
to be impressed with the importance that must be given to four 
general conditions, in any solution that may be suggested : 

First, the great increase in, and broadening of, the purposes 
for which taxation is now levied, and the necessary accompany- 
ing increase in the volume of taxation ; 

Second, the continuous narrowing in the base sustaining tax- 
ation ; 

Third, the changes that have taken place in the character of 
property since our present taxation system was adopted, and the 
failure at the present time of the ad valorem general property 
tax to reach and equitably tax all property; 

Fourth, the relative importance now held by a class of citi- 
zens whose income is the result of personal effort and not drawn 
from capital represented by any form of property. 

Expanding Demands for Revenue 

In the year 1909 the total amount of taxes levied in Michigan 
under the ad valorem general property tax law for all purposes 
— state, county, school and municipal — was in round numbers 
$34,879,000; in 1917 it had increased to $73,612,000; in 1918 to 
$85,132,000; in 1919 to $110,776,000. The records for 1920 have 
not yet been compiled, but from the reports that have reached 
the office of the Board of State Tax Commissioners it is certain 
that for the present year it will exceed $125,000,000. It must be 
borne in mind that these sums do not include taxes paid by 

1 Eleventh Report of the Michigan Board of State Tax Commissioners 
and State Board of Assessors. 1920. p. 25-46. 



262 SELECTED ARTICLES 

public utility corporations into the primary school fund, or the 
automobile tax paid into the highway fund, or inheritance taxes, 
or mortgage taxes, the total of which for the year ending June 
30, 1920, was $14771,746. 

The following table, comparing taxes levied in 1909 and 1919, 
shows an increase in each total in which taxes are classified : 

Assessed Valuation and Taxes Levied in the State of Michigan 

1909 i9"i9 

Real Estate $1,315,627,624 $3,5 I 5,i43,38o 

Personal Property 371,528,073 988,837,601 

Total $1,687,155,697 $4,503,980,981 

State Tax $5,929,304.89 $17,432,512.04 

County Tax 4,499,690.06 1 1,685,086. 15 

Township Tax 1,150,268.21 2,101,786.11 

School Tax 7,186,799.35 29,753,423.09 

Highway Tax 3,014,344.94 8,658,775.66 

County Road Tax 741,868.05 5,124,191.47 

Drain Tax 267,628.5 1 860,758.73 

City Tax 10,791,845.46 31,587,226.22 

Village Tax 1,291,173.47 3,557,9°9-69 

Rejected Tax 6,170.26 14,436.94 

Total Taxes $34,879,09320 $110,776,106.10 

Average Rate per $1,000 $20.67 $24.60 

This continuous tremendous increase in the volume of taxa- 
tion is not, to any appreciable extent, the result of waste, ex- 
travagance or mismanagement and is due, only in part, to the 
increased cost of living. Rigid economy, consolidation of 
(Boards, efficient budget administration, undoubtedly will ac- 
complish saving. There will be, also, saving through recession 
in prices in the course of readjustment from war conditions; 
but in considering this factor it must be recognized that for 
years to come, prices will continue on a considerably higher 
plane than in the past. 

The relief which we may expect from readjustment in prices 
and saving in administration, will, we believe, be more than 
swallowed up by constantly increasing expenditure resulting 
from the continuous increase in, and broadening of, the purposes 
for which taxation is now and will be, in the future, levied. The 
state, the counties, the municipalities, even the smallest local 
communities, have entered upon projects of development, espe- 
cially with respect to highways, streets, sewers, schools, public 
buildings, parks, etc. that will continue to require increased mil- 
lions for years to come. These projects of development, it should 



TAXATION 263 

be noted, are financed, only partially, by present day taxation. 
The main reliance is upon bond issues drawing comparatively 
high rates of interest, and in the future the interest upon these 
bonds, as well as the principal as it matures, must be added to 
the annual tax levy. 

Expense, that is reflected in the annual tax levy, follows de- 
velopment in lines that are purely industrial or commercial, and 
in no way connected with any public business. For illustration, 
note the cost to the public of automobile development. The 
state-wide program of highway improvement, now calling for an 
annual outlay of millions of dollars, owes its rapid advancement 
and present importance very largely to motor-vehicle develop- 
ment. The cost of constructing improved public highways has 
been increased to three and four times the cost when only horse- 
drawn vehicles used the highways. The cost of maintenance 
after construction, as compared with cost in former years, has 
increased in the same ratio. The cost of public safety and ad- 
ministration of justice has been increased because of traffic 
policemen, motorcycle squads, recovery of stolen machines, and 
the combating of new forms of crime practiced by the auto 
bandit. The automobile carries the sportsman and the seeker 
after health and recreation, surely and in ever increasing num- 
bers to the new and more remote parts of the state, putting an 
increased burden upon the highways, and increased pressure 
upon public lands suitable for resorts, and upon the resources 
of our streams, lakes and game fields. All this will call for in- 
creased appropriations for the establishment and maintenance of 
public parks and game refuges, for fire protection, for game pro- 
tection, and for the propagation and distribution of game and 
fish. 

The requirements of various state institutions, especially 
those concerned with education, public health, safety, and wel- 
fare, always have been generously met and, because of the na- 
ture of the appeal they make, will continue to receive favorable 
consideration. To appreciate the increase in the demands of 
state institutions, compare the totals now declared to be indis- 
pensable with the sums required by these institutions a few years 
ago. Note also that the increases asked for at this time are not 
only those made necessary because of increased cost of living 
and increasing population, but they extend to new plants and 
new outfits declared necessary because of modern theories of 



264 SELECTED ARTICLES 

construction, sanitation and management, and if not now 
granted must be in the near future. Note, also, that these con- 
ditions are not confined to state institutions but extend to those 
of the counties and cities as well. 

Another condition that is increasing, directly and continu- 
ously, the volume of taxation is the tendency of the various po- 
litical units of the state to take over, as proper and necessary 
functions of government, a large group of subjects relating to 
both public and private welfare that, until a few years ago, were 
left entirely to private initiative and private philanthropy; or, 
if in operation at public expense, functioned only in a limited 
way. These subjects range from the visiting nurse and public 
playgrounds for children, to tuberculosis hospitals and mothers' 
pensions for adults. They relate to public health, sanitation, 
comfort, recreation, child welfare and any number of kindred 
subjects. They increase in number and scope every year, and 
; each new feature taken over calls for and justifies the develop- 
ment of some other feature of public or private welfare at pub- 
lic expense. No one will see, or should wish to see, these new 
functions of government restricted. The world is now in a new 
orbit and one of the forces that will tend to keep it balanced in 
this new orbit is a proper and continuous development in public 
and private welfare through public expenditure, and this condi- 
tion necessarily means a continued increase in the volume of 
taxation. 

The second condition to which we have referred — the con- 
tinuous narrowing in the base of taxation sustaining this enor- 
mous constantly increasing volume of taxation — is also operat- 
ing as certainly, as continuously and as efficiently as is the con- 
dition of constantly increasing volume of taxation. 

Contracting Basis of Taxation 

The base of taxation in Michigan is the ad valorem general 
property tax law. Contemporaneous with its enactment by the 
Legislature, that body began the process of cutting away, 
through the granting of exemption from taxation, and it has 
continued the practice down to the present day. The laws ex- 
empting property from taxation are being constantly added to, 
and they have a tendency to widen in their application, and they, 
more and more, exempt property not contemplated to be 



TAXATION 265 

exempted by those originally responsible for such legislation. The 
exemption of so much of the taxable credits of a taxpayer as 
can be offset by his debits, without regard to the character of 
the debits and whether taxable or not, is a particularly vicious 
form of tax exemption. Through the mortgage tax law we are 
continually creating non-taxable credits by a single payment of 
five mills. For the debtor in the same transaction these non- 
taxable credits are legal offsets continuously, year after year, 
against money, accounts, unsecured notes or other forms of 
credits subject to taxation at the full rate of the general prop- 
erty tax. The narrowing in the base of taxation through exemp- 
tion of property from taxation is measured by hundreds of mil- 
lions of dollars. 

Home rule and municipal ownership of public utilities is 
rapidly and to an alarming extent narrowing the base of tax- 
ation. Not many years ago municipalities confined their efforts 
in the public utility field to such necessary public service as did 
not attract private capital, such as a municipal water system 
and public lighting. Private investment in public utilities was 
encouraged and became a fruitful and constantly increasing 
source of public revenue through taxation. Now, all is changed 
and such services as private lighting, power, heat and transpor- 
tation are considered public functions and are being established 
under municipal ownership, and a tendency to take over activ- 
ities of this character now in private ownership is increasing 
everywhere. The city of Lansing has taken over the Michigan 
Power Company, and because of such action more than $800,000 
in valuation dropped from the assessment rolls of the city. 
When the city of Detroit takes over or forces from her streets 
the Detroit United Railway, approximately $30,000,000 in valua- 
tion will disappear from the tax rolls of that city. There is 
hardly a municipality in the state that is not contemplating 
the taking over or development of some form of public service 
now in private ownership. We are not regretting municipal 
ownership of public utilities. We are simply pointing out the 
inevitable effect the working out of the principle is having upon 
general taxation. The enactment of state and national pro- 
hibition cut a big slice from the base of taxation because of the 
disappearance of property that was formerly directly employed 
in the liquor business, and because of the depreciation in value 



266 SELECTED ARTICLES 

of property still in existence, such as breweries, warehouses and 
personal property. Here, again, we are not arguing the ques- 
tion of prohibition but pointing out how it is affecting taxation. 
The most pronounced, the greatest numerically and most to 
be regretted narrowing in the base of taxation is that which 
has resulted from the failure of the general tax law to reach 
intangible property. Taxation of intangible property at a uniform 
rate with other property has always been the weakest spot in 
every general property tax system, because the locating and 
valuing of such property is always difficult and generally im- 
possible without the cooperation of the owner. That cooperation 
is not always sought and is given rarely; the owner justifying 
himself in the concealment of such property on the ground 
that his certificates or securities are but evidence of his partici- 
pation in the ownership of tangible property already taxed, or 
on the ground that the uniform rate of taxation, applied to 
such property, would confiscate income, as would often be the 
case with savings deposits and securities drawing a low rate 
of interest; the result being that practically all such property 
escapes taxation except such as is in the hands of the ignorant 
or the helpless. 

Economic and Social Evolution 

Failure to locate and tax intangible property made little 
difference in the early days of Michigan when the ad valorem 
general property tax system was established. At that time 
agriculture was the principle industry. Property was homogen- 
eous, consisting mainly of real estate and tangible personal 
property dependent upon the ownership of real estate. There 
was very little intangible property. Wealth was distributed 
comparatively even, the range of investments was narrow, earn- 
ings, and profits were generally converted into property of the 
same nature as that which produced them. But a wonderful 
change has taken place in recent years in the character of 
property, brought about largely through the operations of what 
may be declared the greatest instrument of modern commercial 
life — the limited liability corporation and its accompanying 
secured debt feature, through which an individual may invest 
in any business wherever located and hazard only his orginal 
investment, his interest represented by intangible securities easily 
transferable. The resulting commercial and industrial expansion 



TAXATION 267 

has been almost beyond comprehension. Agriculture has been 
displaced as the leading industry. The homogeneous character 
of property has disappeared and, instead, it is now widely 
diversified. Many new forms of property have been brought 
into existence as a result of invention, commercial and indus- 
trial development, and legal and corporate contrivance. Income 
has increased greatly, and is derived from numerous and often 
entirely new sources. It is, for the most part, no longer re- 
invested in the business which produced it, but seeks investment 
in intangible and, wherever possible, non-taxable securities. To 
appreciate the extent to which profits that are fluid are passing 
into intangible, non-taxable investments, one has but to glance 
over the columns of any metropolitan daily newspaper and notice 
the offering of new securities. Today, a very considerable 
portion of the wealth of the state is in intangible property, and 
failure, at this time, to properly tax the owners of such wealth, 
whether as a result of legislation or administration, relieves 
many from all taxation. 

Rise of Professional and Salaried Class 

At the same time, and largely as a result of industrial and 
commercial expansion, a class of citizens has been developed in 
every community whose income is not derived from capital 
represented by property, but from salaries, from earnings as 
professional men, and from particular kinds of business that 
are being daily brought into existence. This class is generally 
well educated, and requires more from society and government 
than the average individual requires. But the general property 
tax fails to reach this class of citizens, they contribute little 
through taxation, either for the support of government or the 
development of social welfare. 

Real Estate Bearing the Taxation Burden 

The accumulative effect of all these conditions : — a constant 
increase in the purposes for which taxation is now levied ; a 
constant increase in the volume of taxation ; a constant nar- 
rowing in the base of taxation through legislation and admin- 
istration; changes in the character of property, due to com- 
mercial and industrial development, and in the comparative 
wealth of individual citizens; failure of the general property 
tax to reach intangible property at a time when such property 



268 SELECTED ARTICLES 

is increasing faster than an)- other form of wealth and is 
absorbing the profits of all kinds of -business ; the rise of a 
highly prosperous class whose income is not drawn from prop- 
erty but from individual effort and from new and strange 
forms of business, has produced this inevitable result; that 
practically all the increase in the tax burden falls upon tangible 
property, which is mainly real estate ; and heaviest of all upon 
that form of real estate which, because it is visible and easily 
valued, is always highest assessed, the farm and the home. 

This condition — that under our general property tax law 
real estate must inevitably stand practically alone in bearing 
the increased burden of taxation arising out of new social and 
economic conditions, has not been appreciated in the past because 
of the universal undervaluation of all property assessed for 
taxation. But now that the assessment of tangible property is 
very close to cash value throughout the state, continued increase 
in assessment, sufficient to keep the rate of taxation from 
mounting, will no longer be possible ; and the ad valorem gen- 
eral property tax, as the only base of taxation, will be clearly 
recognized to be unfair and unequal, as exempting many frQm 
all taxation, and as falling with the greatest force upon those 
least able to pay. 

Futility of Remedies Proposed 

The change in the purposes for which taxation is now levied 
and in the character of property, and the shifting of the burden 
imposed by new social and economic conditions upon real estate, 
have not been unnoticed, and attempts to remedy this situation 
have been made by the Legislature at different times. But 
because of a desire to maintain as far as possible the general 
property tax and because of the constitutional limitation im- 
posing a uniform rule of taxation, such attempts have been 
limited to the substitution of specific taxation for the general 
property tax upon certain forms of intangible property; the 
mortgage tax is an illustration of the attempts of the Legislature 
to reach intangible property with some form of taxation. 

Can we further amend or so administer the general property 
tax law as to overcome the opportunities for concealment and 
enable us to locate such property, and derive from its taxation 
revenue in any way proportionate to the amount of such property, 



TAXATION 269 

taxable in the state? The experience of other states that have 
had the same system of taxation and the same problem to solve, 
and that have attempted to reach this class of property by 
drastic measures, has been universally the same. They have 
either failed to locate any considerable amount of such property 
or it has again disappeared after having been once located and 
taxed. We cannot take away from the owner the state of mind 
that justifies concealment, namely, — that taxation of such prop- 
erty is unjust in theory and confiscatory of income in practice. 
We cannot destroy the opportunities that exist for concealment 
of such property. We cannot in all cases convince the assessing 
officer that such property exists and should be taxed, and that 
it is his duty to find and tax it. A Judge of the United States 
Court of Appeals in commenting upon the taxation of intangible 
property under general property tax laws expressed himself as 
follows : "There is a monotonous uniformity in the reports of 
the failure of every system attempted. However stringent may 
be the legislation, or however arbitrary and despotic may be the 
powers with which the assessors are clothed, the result is that 
always and everywhere no appreciable part of such intangible 
property is reached by laws however ingeniously framed or 
severely enforced." 

If we continue attempts to apply the ad valorem general 
property tax law, as now framed and amended, to intangible 
property, and should, through the application of drastic methods, 
reach any considerable degree of success, what permanent in- 
crease in revenue would result? In the first place, the laws of 
our state exempt from taxation stocks and securities of Michigan 
corporations whose tangible property is caxed in the state ; there- 
fore the individual whose intangible property is all of Michigan 
origin would pay no direct tax, regardless of the amount of 
his wealth. Next, the mortgage tax law, now extended so as 
to include bonds of foreign governments and municipalities, 
and all forms of secured debts, makes such property exempt 
from taxation for all time on the- payment of a single tax of five 
mills. If this law be not repealed, the individual whose intangible 
property has once paid the five mill tax will thereafter pay no 
direct personal tax. If the law be repealed and all such prop- 
erty brought again under the general property tax, all present 
holdings of such property that have paid the five mill tax would 



270 SELECTED ARTICLES 

still remain exempt. Again, the large and growing class of 
citizens who have little property, but enjoy large salaries or 
large incomes as the result of personal effort or professional 
service, and who receive more than the average citizen from 
government, would pay no tax. There would remain only those 
having deposits in banks, unsecured debts, and certificates of 
stock in foreign corporations, to be reached by the general prop- 
erty tax. ' There are more than $1,000,000,000 on deposit in 
Michigan banks, but no bank official can be compelled to disclose 
the names of his depositors, or the amount of their balances. 
The state of Connecticut once attempted to compel such dis- 
closure for the purposes of taxation, and had it not been that 
the strong insurance companies of Hartford had millions of 
dollars available for deposit, every bank in that state would 
have failed over night. As for certificates of stock in foreign 
corporations, should we once succeed in reaching them, they 
would seek safety in concealment before the next assessment. 
We can see but little permanent relief to real estate from the 
most successful administration of the ad valorem general prop- 
erty tax law applied to intangible property. 

A solution of the problem of taxing intangible property is 
sometimes attempted by classifying such property and imposing 
different rates upon different classes — a low rate upon savings 
bank deposits, a somewhat higher rate upon bonds and mortgages, 
and still another rate upon more profitable classes of intangible 
property, the assumption being that by lightening the burden, the 
owners of such property will cease to conceal it and it can be 
made to yield some revenue. The State Tax Commission in its 
report to the Governor in 1914 recommended changes in our 
tax laws so as to allow classification of intangible property. 
The experience of other states where classification of property 
is practiced shows that even in such form the law is persistently 
evaded. The opportunities for concealment still remain. The 
belief of the taxpayer, that such form of taxation is double 
taxation and consequently unjust, still remains. Classification 
of property would require a constitutional amendment, and the 
experience of other states shows it to be almost impossible to 
convince the voters that intangible property, if directly taxed, 
should be taxed on any other basis than general property. The 
farmer assessed $5,000 on his farm and paying $100 in taxes upon 



TAXATION 271 

the same would not vote that the owner of a $5,000 bond or 
stock certificate should pay only $25 in taxes. 

How then can we remedy taxation conditions? How broaden 
the base of taxation? How introduce universality and equality 
of burden into our taxation system and at the same time increase 
revenue to meet the new social and economic conditions? 

Fundamental Principles of Taxation 

Students of tax legislation recognize three fundamental prin- 
ciples as more or less developed in the taxation systems of the 
various states, which, taken together, conform to all require- 
ments of a model taxation system : 

First, that tangible property of whatever character and by 
whomsoever owned should be taxed by the jurisdiction in which 
it is located because of benefits and protection there received ; 

Second, that every person having "taxable ability" — and by 
that we mean "who is able to pay" — should pay a direct personal 
tax to the government under which he is domiciled, and from 
which he receives the direct personal benefits and protection 
that government and society confer: 

Third, that business carried on for profit in any locality 
should be taxed in that locality because of benefits and protec- 
tion there received. 

Tangible Property Taxation 

The first proposition — that tangible property, whether real 
estate, livestock, machinery, merchandise or raw materials, 
should be taxed where located regardless of ownership has 
always been accepted by the lawmakers of Michigan without 
reservation, and is now developed, in practice and legislation, 
by the experiences of more than three-quarters of a century. 
Those experiences, we believe, make it certain that this principle 
should not be modified as far as real estate is concerned, except 
as to forest property. With respect to tangible personal prop- 
erty, we recognize that there may profitably be departures from 
it in certain cases, such as the substitution of specific taxation 
for the general property tax with respect to motor-vehicle 
property. We also recognize that where the second and third 
propositions above outlined are fully developed, certain kinds 
of tangible personal property, such as tools, implements, live- 



272 SELECTED ARTICLES 

stock, may properly be exempted in whole or in part from the 
operation of this first principle, but the principle itself should 
stand practically without amendment. 

Direct Personal Taxation 

The second proposition — that every person having "taxable 
ability," that is, "able to pay," should pay a direct personal tax 
where he is domiciled — while equally as just and logical as the 
first proposition, and as widely recognized, has been practiced 
far less successfully. It has been attempted through poll taxes, 
rental taxes, taxes upon professions and occupations; but the 
more general practice has been to attempt it by making "intang- 
ible property owned" the measure of the individual's "taxable 
ability," and assessing him for such securities and credits as he 
might declare, or the assessor locate. Michigan has adopted 
this method and includes all kinds of intangible property under 
the general property tax, applying the uniform rate, and has only 
in recent years modified it by the adoption of the so-called 
"Mortgage Tax Law." She has recognized the principle of 
direct personal taxation, but has destroyed its vitality by her 
method of enforcing it. 

Net Income the Unfailing Index of Taxable Ability 

The most universal, the most complete and the most accurate 
measure of the ability of the individual to pay personal taxes is 
"net income." "Personal property owned," correctly determined 
and expressed in dollars, will measure the taxable ability that 
comes from the ownership of certain kinds of wealth, such as 
securities and credits. "Net income" will measure such wealth 
equally as well, and will measure "taxable ability" resulting from 
the earnings of the salaried man, the professional man, the busi- 
ness man, the laborer; it measures "taxable ability" resulting 
from rents and royalties, and introduced into a system of taxa- 
tion, it materially broadens the base of taxation. 

Adam Smith, years ago, laid down this proposition: "Sub- 
jects of every state ought to contribute to the support of the 
government as nearly as possible in proportion to their respec- 
tive abilities; that is, — in proportion to the revenue which they 
respectively enjoy under the protection of the state." Other 
students of taxation, holding that taxes are the part of the citi- 



TAXATION 273 

zen's property or earnings he contributes for public use in order 
to insure protection for the rest of his property or income, have 
supported Adam Smith's proposition that taxation should be pro- 
portional ; declaring that as protection or benefit received is pro- 
portional to the amount of property protected or income enjoyed, 
it necessarily follows that taxation, to be equitable, must be 
directly proportional to property or income. Most modern writ- 
ers, while not objecting to proportional taxation of tangible 
property, hold that direct personal taxation, through an income 
tax, should not be proportional, but progressive. Even Adam 
Smith modified his famous principle by declaring: "It is not 
unreasonable that the rich should contribute to public expense 
not only in proportion to their revenues but something more 
than proportion." Practically all agree that it is not wise to 
exact a personal tax for support of government from any class, 
if by so doing the standard of living of that class is necessarily 
reduced below a proper level, and therefore exemption from any 
personal tax is recognized as proper for those whose net income 
does not exceed the sum recognized as the minimum necessary 
for proper subsistence. This exemption is a departure from 
proportional taxation. Protection or benefit resulting from tax- 
ation is not the only thing that should be considered, — there is 
also the sacrifice involved in paying the tax, in giving up for 
public use something that would otherwise be made use of to 
satisfy personal wants. It is the right of every individual to 
make use of all his income in satisfying his wants, and any 
restriction of the power to do so necessarily involves sacrifice 
on his part. Personal taxation in the form of taxation of income, 
therefore, involves sacrifice of some of our wants. But our 
wants are not all equally pressing and the sacrifice required in 
giving up comforts that border on actual necessities of life is 
much greater than is the sacrifice that does not involve giving 
up any comforts and only the more extreme luxuries of life. 
Proportional taxation, the requiring everyone to pay the same 
rate of income taxation, gives no consideration to the inequal- 
ities of sacrifice required as between incomes of different amounts. 
True equality in income taxation should consider the sacrifice 
involved as well as the benefit received and not require that 
the same rate of taxation should be paid by all, but that rates 
should be so arranged as to require, as near as possible, the 



274 SELECTED ARTICLES 

same degree of sacrifice from all. Actual and complete equality 
of sacrifice is of course impossible of attainment. But by im- 
posing a low rate upon small incomes and increasing the rate 
as the income increases, by making the income tax graduated 
or progressive, whichever you choose to call it, we can secure 
relative equality of sacrifice. 

A personal income tax, with exemptions sufficient to enable 
the individual to maintain a proper standard of living, and with 
rates of tax graduated so as to equalize as far as possible the 
sacrifice imposed, is the fairest, the most equitable, and the least 
oppressive system of taxation as yet devised, and the only sys- 
tem that will reach those whose wealth is in intangible property, 
and those whose income is derived from personal effort. 

Justice and Equity of Income Taxation 

The justice and equity of the graduated income tax is shown 
by the fact that it conforms at all times and for all classes to 
the principle of "ability to pay." It not only relieves those with 
little property from heavy burdens, but also, in the case of those 
with large wealth, it responds to the variations in individual con- 
ditions that occur with all citizens from year to year. An in- 
dividual may be highly prosperous one year and have little in- 
come the next year without any apparent change in the amount 
of property owned. The general property tax is merciless in its 
exactions and is regardless of conditions, but the graduated in- 
come tax responds to such conditions. The progressive income 
tax never confiscates property, but the general property tax con- 
fiscates hundreds of thousands of dollars worth of property 
every year. 

Great Scope of the Income Tax 

The justice and equity of the progressive income tax is 
further shown by the fact that it reaches officials, professional 
men, and certain classes of business men who escape entirely the 
general property tax. Of such it is the truth to say that their 
gains are comparatively large. They live in style and comfort. 
They enjoy the protection and benefits of government and 
society without contributing directly to its support. They are 
also, as a class, well educated and well informed, but by reason 
of being untouched by taxation they have little concern as to 



TAXATION 275 

public business, and are apt to become indifferent to their 
duties as citizens. The bringing of this class into the group of 
taxpayers is a distinct public gain from more standpoints than 
that of revenue. 

Practically all political economists recognize the justice and 
equity of income taxation as a theoretical proposition. Those 
who oppose it generally do so on the ground that it fails in 
practical operation, and cannot be administered on the high plane 
claimed for it ; that it is inquisitorial in character, and hence 
not suited for democratic governments ; that it is socialistic ; 
that it is a tax on brains, energy and industry; that it invites 
perjury and evasion; that, in the past, it has failed as part of a 
state taxation system and responded neither to the demands of 
justice nor the needs of revenue. 

Previous to 1903, sixteen of the states of the Union had 
attempted income taxation ,in some form, but on that date only 
six of the states were continuing such attempts. The failure 
of these early attempts was due, in part, to defects in the laws 
themselves, which were generally special taxes upon income from 
particular sources and rarely a general tax upon net income ; 
but, chiefly, the failure was due to the utter inefficiency of 
their administration. In respect to both legislation and admin- 
istration, these early attempts at state income taxation are no 
more to be compared to the modern state income tax systems, 
such as are now administered in Wisconsin, New York, Massa- 
chusetts, Missouri, Oklahoma, and other states, than the old 
street cars drawn by horses or mules are to be compared to 
the modern municipal transportation system. 

Income Taxation the Great Barrier to Socialism 

The argument that the income tax is inquisitorial and un- 
democratic is absurd and unconvincing. What tax system 
efficiently administered is not inquisitorial? The general property 
tax is inquisitorial, especially when applied to personal property. 
Under it the assessing officer is authorized to demand from 
the taxpayer a full statement of all his property, money, credits, 
debts, securities, even the jewels and adornments of his family. 
The tariff tax is inquisitorial. You must declare every article 
you bring into the country and its cost, and this does not give 
immunity from personal examination of your possessions. The 



276 SELECTED ARTICLES 

internal revenue tax in its entire administration is inquisitorial. 
If tax laws are not inquisitorial and not administered in that 
way, they are evaded more or less, and honest men suffer and 
dishonest men gain. If we do not repeal the general property 
tax as far as it applies to intangible property, and if we are to 
have any degree of success in enforcing that tax, we must ad- 
minister it in the most inquisitorial manner. The fact that tax 
laws not administered in an inquisitorial manner are continually 
evaded is not due to the particular character of the tax, but to 
the nature of taxation itself which is "sacrifice without glory' 
or even without recognition of the sacrifice, and human nature 
has not yet reached the point where it does not try to evade 
such form of sacrifice. To condemn the graduated income tax 
because it endeavors to prevent evasion, compels us to condemn 
efficient administration of all tax laws. John Sherman, former 
Senator from Ohio and Secretary of the Treasury, speaking on 
this question, said : "The income tax is the least inquisitorial and 
injurious of all taxes imposed by government and is the one 
tax that falls upon office and upon brains." 

The further claim is made that the income tax cannot be 
efficiently administered without causing capital to seek immunity 
by withdrawing from the states enforcing such a tax. The 
refutation of this claim is found in the attitude of the states 
administering a present day personal income tax, such states 
as New York, Massachusetts, Wisconsin, Missouri and Oklahoma 
Not one of them, after experience with this form of taxation, 
has any thought of repealing its income tax law or of changing 
it other than to make it more inclusive. New York and Massa- 
chusetts are especially the home of capital, and would be ma- 
terially injured if capital actively resented the imposition of a 
state income tax. This argument is further refuted by the 
reports of the commissioners or officials charged with admin- 
istering income taxation. In Wisconsin, for instance, the amount 
of the income tax levied increased from $4,145,676 in 1914 to 
$11,784,151 in 1917, a condition which would not exist if wealth 
were not increasing at a tremendous rate within the state, 
instead of being driven from the state. This contention is 
also refuted by the fact that half a dozen state Commissions, 
after studying the operation and effect of state income taxation 
in recent years, have reported, or are preparing to report, at 



TAXATION 277 

an early date, to their respective Legislatures favoring an 
income tax system for their respective states. As an instru- 
ment for driving capital from a state, the income tax is not 
to be mentioned in the same breath with the ad valorem general 
property tax upon intangible property efficiently administered. 
The argument that the income tax is inquisitorial and cannot 
be successfully administered is often supplemented by the charge 
that it is "socialistic" in character. Why it is any more socialistic 
to tax a man on his net income than it is to tax the particular 
property producing the income is difficult to see. Graduated 
income taxation might be called "socialistic" if its avowed pur- 
pose or actual result was to aid in bringing about such economic 
results as the more even distribution of wealth or the confiscation 
of private property; but such is not the purpose or the result. 
The equalizing of sacrifice imposed by taxation is as necessary 
to exact justice as is the granting of equal rights and equal 
opportunities. Many who would scorn to be classed as "social- 
istic" contend that taxation may properly fill an economic or 
social role as well as a strictly revenue role. Protective tariff 
laws are not framed for revenue alone, but for the added and 
openly avowed purpose of aiding industrial development and 
individual prosperity. Sumptuary laws often have the avowed 
purpose of checking consumption as well as the production of 
revenue. Other taxes are equally open to the charge of being 
socialistic. The general property tax, in that it affects only 
property owners and is always loaded down with exemptions, is 
socialistic. Inheritance taxes are still more open to the charge 
of being socialistic. The cry "socialistic" has many times been 
used to impede social reforms that have been successfully 
inaugurated in spite of such opposition. This cry was used 
against child labor legislation, against mothers' pensions, just 
as it is now used against progressive income taxation. If we 
continue to run from social reforms, and decline to undertake 
economic reforms at the cry "socialistic," we will assist the 
Socialist Party in its campaign for true socialistic doctrines, 
with which we have no sympathy. 

Comparison of Federal and State Income Taxation 

Objection to the personal income tax will come from those 
who do not understand the difference between the proposed 



278 SELECTED ARTICLES 

state income tax and the existing Federal income tax. The 
Federal income tax is new taxation designed to collect a very 
large revenue, made necessary by war-time expenditures of the 
government. It does not displace any existing taxation. It is 
not designed to equalize taxation. It is a revenue measure, 
solely, and, for that reason, is loaded down with high rates of 
taxation, excess profits taxes and many features of administra- 
tion that are exacting in character and annoying to the tax- 
payer. The proposed state income tax, on the other hand, is 
intended as a substitute for that part of our present taxation 
system which fails in operation. Its purpose is equalization 
of taxation rather than increased taxation. Millions of in- 
creased revenue must be raised in any event and to raise it 
through income taxation will not increase the burden of those 
now contributing their proper quota ; it will come from those 
now escaping taxation. The state personal income tax should 
be simple, easy to administer, with no excess profits taxes and 
the highest rate not exceeding 8 per cent. 

Immediate Action Necessary 

There is a disposition on the part of taxpayers to endure con- 
ditions with which they are familiar rather than to substitute for 
them other conditions with which they have had no experience. 
There is the feeling on the part of many people that the coun- 
try is now going through a period of readjustment, in the course 
of which the program of Federal taxation may be radically 
changed. There are some who suggest alternative propositions 
for the state income tax, such as a refund by the Federal Gov- 
ernment to all the states of a fixed per cent of the income tax 
collected in each state; or the levy of a surtax upon the Fed- 
eral income tax by such states as desire state income taxation. 
Both alternative propositions could limit the actual administra- 
tion of all income tax legislation to officials of the United States 
Government. The proposition of a refund to the states by the 
Federal Government would also result in uniform tax rates and 
uniform methods of administration throughout the United 
States. All holding such views argue that we should delay en- 
tering upon the solution of our taxation problems. With this 



TAXATION 279 

sentiment we have no sympathy. Income taxation, for state 
and nation, has come to stay. The operations of the Federal 
income tax have made the people familiar with the principle of 
income taxation, and the question of introducing this principle 
into our taxation system should in no way depend upon the 
rates of the Federal income tax or the amendment of its excess 
profits tax features. Thirteen states have adopted some form 
of income taxation. We have the legislation and practical ex- 
perience of these states to guide us. Other states have studied 
the question and the results of their investigations are available 
for our information. The taxation problem of Michigan is 
now acute in every political subdivision of the state. Action 
to replace the present, unenforcible law for the taxation of in- 
tangible property, with a law that will reach such property is 
imperatively demanded at the earliest possible date. 



ADVANTAGES OF THE INCOME TAX 1 

The income tax reaches everyone in accordance with his 
ability to pay. It is the one tax that will most fairly and 
equitably reach the professional and salaried men who earn 
large incomes. They now entirely escape taxation except on 
such property as they may have accumulated and which very 
obviously is no fair indication of their ability to contribute to 
the support of government. 

This is likewise true in respect to the great wealth, represented 
by the securities and credits of all kinds and by various forms 
of intangible property, which is now escaping taxation. One of 
the most interesting facts to be gained from a study of the Wis- 
consin results is, that the classes of occupations, of professions 
and of property-owners that most successfully escape in New 
York, are the very ones that pay the larger part of the Wiscon- 
sin tax levied upon firms and individuals. In New York State 
the following classes are able to escape taxation in a large 
degree: Bankers and capitalists, brokers, lawyers, merchants and 
jobbers, manufacturers, physicians and surgeons, and other pro- 
fessions. 

1 Report of the Joint Legislation Committee on Taxation of the State 
of New York. 1916. p. 195-206. 



280 



SELECTED ARTICLES 



We quote in this connection from the Report of 1914, which 
reads as follows : 



?5 a o x s 3 § a 
Sa ££ c % g "s = 

1-S |3 1| §| |3 

Be- g U Z U B n * 

30 > a, ajg u,_g 

Occupntic.n Z < (h k a £< 

Bankers and capitalists 982 $116.33 8.00 1.61 4.76 

Estates, guardianships, etc 977 82.42 5.98 1.60 3.76 

Lumbermen 346 81.27 1.97 .57 1.32 

Manufacturers 2,920 78.26 16.01 4.80 11.36 

Lawyers 1,202 59-26 5.02 1.97 4.18 

Miners 80 38.89 0.22 .13 .18 

Retired 3,263 37-24 8.51 5.36 6.93 

Merchants and jobbers , 11.838 24.13 20.01 19-45 23.55 

Physicians and surgeons 1,642 22.78 2.62 2.70 3.30 

Brokers, real estate men, etc.. 5,338 20.86 7.80 8.77 8.72 

Public officials 555 16.05 0.62 .91 .93 

Mechanics and tradesmen .... 5,768 12.63 5-io 9.48 6.17 

Professions — miscellaneous .... 2,359 12.30 2.03 3.88 2.96 

Professors and teachers 2,372 10.40 1.73 3.90 2.08 

State and public employees.... 1,203 8.15 0.69 1.98 .99 

Public service employees 2,870 7.96 1.60 4.72 2.07 

Farmers 7,225 7.66 3.87 1 1.87 6.40 

Bookkeepers, stenographers, etc. 4,148 4.96 1.44 6.82 2.54 

Laborers 882 2.91 0.18 1.45 .34 

Other occupations 4,336 20.25 6.15 7.12 6.78 

Unknown 554 11.71 0.45 .91 .68 

All occupations 60,860 23.46 100.00 100.00 100.00 

Certain important conclusions may, however, be drawn with 
safety. For instance, the census statistics make it plain that 
there are not less than one hundred sixty-five thousand 
farmers in the state, from which it follows that certainly less 
than 5 per cent of the farmers of the state are subject to the in- 
come tax. Similarly, it is certain that considerably less than 1 
per cent, and probably less than l / 2 of 1 per cent, of the laborers 
of the state are assessed for income taxes. Of the bookkeepers, 
stenographers and clerks, the statistics indicate that something 
less than 6 per cent were assessed for income tax in 1914. 

On the other hand, it is practically certain that more than 50 
per cent of the bankers and capitalists, lawyers and physicians 
and surgeons were subject to the individual income tax, to say 
nothing of the amounts which these persons pay indirectly 
through the tax on corporations. It is interesting also to note 
that probably not less than 20 per cent of the public officials, 
public employees and public laborers of the state were assessed 



TAXATION 281 

for income tax. The federal census for 1910 shows 7,338 em- 
ployees in the public service, not elsewhere classified, including 
guards, watchmen, doorkeepers, firemen and laborers. Table IV 
shows that 1,758 public officials and employees were assessed for 
income tax in 19 14, or somewhere between one-quarter and one- 
fifth of the number recorded in the census. There cannot be a 
very large number of public employees classified elsewhere than 
in this group. 

Perhaps as good a measure of the relative burden of the 
tax as could be secured is found in the figures showing the 
average tax per taxpayer. The various occupations are arranged 
in the order of the size of this average tax in Table VI. The 
highest per capita tax, $116.33, is paid by bankers and capitalists; 
the lowest by laborers, $2.91. The tax was evidently highest 
upon investors and allied classes, those drawing their incomes 
largely in the form of interest. Next it touches the extractive 
and manufacturing industries — lumbering, manufacturing and 
mining — though it should be remembered that in these classes a 
relatively large proportion of the tax is offset by the personal 
property tax. Merchants and jobbers follow closely, among 
whom also a large part of the tax is offset by personal property 
taxes, and thereafter come the professional classes. The lawyers 
it will be observed are above the other professional classes, 
standing between manufacturers and miners. The tax on the 
professional classes generally is additional or supplementary. It 
is not offset by the personal property taxes and no equivalent 
tax was collected from these classes before the income tax was 
introduced. The statistics indicate that the income tax is per- 
forming exactly the service for which it zvas introduced — draw- 
ing a larger contribution front the investing and professional 
classes and from those elements of the manufacturing and com- 
mercial classes which are usually prosperous and subject to 
higher income than personal property taxes. 

This conclusion is further emphasized when we remember 
that the largest accumulations of so-called intangible personal 
property are found in our great cities, and that the income tax 
is, strictly speaking, an urban tax. In Wisconsin, the first year, 
over 40 per cent of the entire tax was charged in Milwaukee 
County and more than 80 per cent in the seventeen counties 
having the larger cities of the state, while 20 per cent was 



282 SELECTED ARTICLES 

charged in the remaining fifty- four counties containing about 
50 per cent of the population. 

The urban character of the tax is shown in another way 
by the returns from Dane county in which the capital is located. 
In the county there are six times as many farmers as there are 
public employees, "yet only sixty-eight farmers in Dane County 
as contrasted with six hundred twenty-four public employees and 
professors will pay an income tax; and the farmers will pay an 
income tax of $877.35, while the public officials, professors and 
teachers will pay $7,224.44, more than eight times as much." 

The income tax is primarily an urban tax. Milwaukee county, for 
instance, contains only 8.56 per cent of the population of the state, but 
42.55 per cent of the total income and 47.12 per cent of the total income 
tax are assessed in that county. The fifty-four rural counties, on the other 
hand, contain nearly 50 per cent of the population but pay less than one- 
fifth of the tax. 

The marked urban character of the tax comes out in other relationships. 
For instance, the total income tax assessed in 1914 amounts to $1.77 per 
capita. But the per capita tax in Milwaukee City is $4.50, and in the 
rural counties only 53c. Again, the average rate of taxation paid is 3.61 
per cent in Milwaukee County, but only 1.95 per cent in the rural counties 
of the state. Finally, in Milwaukee County 4.69 per cent of the popula- 
tion is subject to the tax on firms and individuals, while in the rural 
districts only 1.71 per cent of the population was assessed. In short, a 
smaller proportion of the people pay, and they pay lower average rates 
on smaller average incomes, in the country than in the city. 

As has already been shown, the property- tax falls with the 
greatest weight on the man of small means, on the widow, on 
trust estates, on young and struggling business concerns, and, 
generally speaking, on those least able to bear it Under the 
income tax these people contribute their proportion, but their 
proportion is relatively small as compared with that of the 
wealthy and prosperous, who enjoy large incomes and are, there- 
fore, better, and with much less sacrifice, able to shoulder the 
tax burden, and yet who, today, are practically free from taxation, 
except in so far as they own real estate. 

We cite again the Wisconsin results for the purpose of 
illustrations : 

This table contains some very significant data. Of those assessed in 
1914 for income tax, 41,732 had taxable incomes under $1,000. This 
group of small taxpayers constituted 68 per cent of the total number, but 
paid less than 11 per cent of the total tax. The average tax in this group 
is $3-74- 

On the other hand, 315 taxpayers having incomes of $15,000 or more, 
and constituting about % of 1 per cent of the total number of taxpayers, 
were assessed for practically 40 per cent of the aggregate tax, and the 
average tax on each person in this group is $i,794- This group of three 
hundred fifteen taxpayers constitutes less than 2/100 of 1 per cent 
of the population of the state. The two upper groups of taxpayers — 
six hundred sixty-seven in number — constitute less than 3/100 of 1 per 
cent of the entire population but contributes nearly one-half of the in- 
come tax. 



TAXATION 



! 

Classified by | o 
amount groups ' •£ g 


cent 
each 

JUP 

total 


_2 a, 
11 


It; &3 
Z * ° ° 


Tax 


cent 
each 
oup 
total 




of Income 


52 




■ H-2 


a> v- t* o 


Ci o -3 


3s| 


Total 


60,560 


100.00 


$73,969,905.25 


100.00 


$1,427,923.13 


ioo.oo 


$23.46 


Under 1,000 


41,732 


63.57 


15,545,782.60 


21.02 


156,202.53 


10.94 


3.74 


1,000 to 1,999 


10,528 


17.30 


11,004,276.71 


18.93 


152,871.09 


10.71 


14.52 


2,000 to 2.999 


3,855 


6.33 


9,210,837.07 


12.45 


110,348.59 


7.78 


28.62 


3,000 to 3,999 


1,691 


2.78 


5,760,689.61 


7.79 


75,436.33 


5.28 


44.61 


4,000 to 4.999 


908 


1.49 


• 4,027,847.43 


5.44 


57,906.82 


4.05 


63.76 


5,000 to 9,999 


1,479 


2 43 


9,820,371.30 


13.28 


182,901.61 


12.81 


123.70 


10,000 to 14,999 


35k 


0.58 


4,245,486.58 


5.74 


127,168.00 


8.91 


361.26 


15,000 and over. 


315 


0.52 


11,354,613.95 


15.35 


565,087.56 


39.57 


1,794.00 



As a further illustration we may give an example of the 
amount that would be contributed by the highest and the lowest 
classes of tax-payers under the terms of the bill attached to 
this report. 72,345 people having incomes less than $3,000 would 
pay a total of $287,587.15, while eighty-two people having the 
larger incomes in the state would pay a total of $1,809,649. The 
result is almost startling, and yet the eighty-two would be paying 
only their share. But neither for the wealthy man nor for the' 
poor man would the burden be a heavy one, for a low rate 
running from J /2 of 1 per cent to a maximum of 2 per cent on 
individuals would satisfy all our needs. Under this rate, with 
an exemption of $1,500 to a single man and of $2,000 to the 
average family, the family man with an income of $3,000 would 
pay but $5 per annum, while the man with an income of $100,000 
would pay somewhat less than $2,000 per annum. Could either 
one of them fairly complain? Nor, under such circumstances, 
would there be any real incentive to escape. 

No man will willingly pay a 2 per cent tax on capital value, 
which amounts to taking from 30 to 50 per cent of his income. 
Experience has shown, however, that he will pay so reasonable 
an amount as 2 per cent on income, particularly when he knows 
that all who should are contributing their share. Under our 
present system the conscientious tax-payer is not only asked to 
pay a confiscatory rate, but he is asked to do so with the full 
knowledge that merely everyone in the community is dodging 
the tax in one way or another. Most men are honest. Most 
men, we believe, are willing to pay a fair and reasonable tax, 
but there is a point in taxation where it is dangerous to test 
human nature too far, and where the honesty of the average 



284 SELECTED ARTICLES 

citizen is forced to give way to the instinct of self-protection. 
Turning now to general business corporations and individ- 
uals and partnerships engaged in business, we find that in so far 
as these classes are concerned, the personal property tax is 
illogical, burdensome, unequal and therefore inequitable ; that 
the great majority of business houses escape taxation, but that 
those that do pay are taxed at a rate altogether too high, a fact 
which puts them at an unfair disadvantage as compared with 
their competitors ; that, in brief, the personal property tax is, in 
the main, a failure, and to the extent that it does succeed, grossly 
unjust. We find, moreover, that the assessment and valuation 
of property gives rise to all manner of difficulties, particularly 
in the case of corporations where it is necessary to include the 
franchise value as part of the gross assets or of the capital stock 
value; and that ultimately the assessors find that the fairest 
way to reach the capital value of the property is through the 
capitalization of net earnings. Few, if any, of the difficulties 
arise when individuals engaged in business and general business 
corporations are taxed on a net-earning basis. As has been well 
said by Dr. Ely in the report of the Man/land Tax Commission : 

Furthermore, it is of moment that the income tax does not make it 
more difficult for a poor man to begin business or to continue business. 
Its social effects, on the contrary, are beneficial, because it places a heavy 
load only on strong shoulders. Even for men of large means engaged in 
business it is a tax to be strongly recommended, for such men will in 
some years make little or nothing, or even lose money. Now, our property 
tax is merciless; it exacts as much in a year when a business man is 
struggling to keep his head above water as in a year of rare prosperity; 
whereas the income tax exacts much only when much can be given without 
financial embarrassment. If it were practicable to substitute an income 
tax for the whole of the property tax it would save many a man from 
bankruptcy. I will repeat, with some modification, in this connection, 
words I used in my special report as member of the Baltimore Tax Com- 
mission: 

"It is the fairest tax ever devised; it places a heavy burden when 
and where there is strength to bear it, and lightens the load in case of 
temporary or permanent weakness. Large property does not always 
imply ability to pay taxes, as taxes should come from income; even when 
assessed on property it is only an indirect device for estimating income. 
An income tax spares the business man in season of distress and helps 
him to weather the storm, but asks a return for the consideration shown 
in days of increasing prosperity." 

Moreover, as we have repeatedly stated throughout this 
report, property is not a fair test of ability to pay, and this is 
particularly true in the case of merchants and manufacturers. 
We again desire to emphasize, that the amount of stock of 
goods on hand or the capital value of the property does not 
adequately measure earning capacity for the purpose of taxation, 



TAXATION 285 

and that we know of no fairer way of determining what should 
be the proper contribution of an individual corporation than by 
considering its net earnings. This is all the more true when we 
consider that it takes, in some instances, several years for a 
business to develop to the point that it can pay a return upon the 
original investment. It is neither good policy nor sound finance 
to overtax an infant industry, nor, for that matter, even an 
established industry, in bad times. Taxes are paid out of income, 
and one of the great advantages of an income tax as a business 
tax is that it levies tribute only when there is an income from 
which to pay it. That the income tax is the best way of taxing 
both individuals engaged in business and general business corpo- 
rations, was the opinion of practically every business man that 
appeared before our Committee, and of the Tax Committees 
of such representative commercial bodies as the Chamber of 
Commerce of the City of Rochester, of the Merchants Asso- 
ciation of the City of New York, and the Chamber of Commerce 
of the City of New York. 

The income tax is the only tax that will reach that great 
class of people who do business in New York City, enjoying all 
of its commercial and other advantages on the same basis as a 
citizen of the state, and who, under the present law, pay no 
taxes whatsoever. 

One of the chief difficulties of our present system is the 
varying rates in different localities which tend to produce grave 
inequalities as between towns and between the residents of dif- 
ferent towns. The tendency, of course, is for taxpayers to 
establish a real or fictitious residence in that locality where the 
rate is lowest, and this inevitably results in injustice to the 
other less fortunate towns and their taxpayers. By the estab- 
lishment of a uniform rate throughout the state, the income 
tax will do away with this situation entirely. "Isles of safety" 
and favorite places of residence will disappear, and individuals 
and corporations will all meet on an equal and fair basis, subject 
to a just burden, and with the full knowledge that it is common 
to all and that there are neither a fortunate many nor an 
unfortunate few. 

To equalize the burden is the principal function for which 
this Committee was appointed. Certain classes of property are 
today paying too much, others too little. No equality can exist 
until those paying too little are compelled to pay their share 



286 SELECTED ARTICLES 

It seems to us that the income tax meets these requirements. 
The Committee has caused to be made various estimates as 
to the possible yield of an income tax in the state of New 
York. Different methods have been used, and a number of 
experts have made various estimates based on these different 
methods. The results in each case are not far apart. All tend 
to indicate that a corporation tax as outlined in the attached 
bill would yield in 1916, at a 1 per cent rate, approximately, 
$9,000,000; at 2 per cent, approximately, $18,000,000; and at 3 
per cent, approximately $27,000,000. In the year 191 7, at 1 per 
cent, approximately, $9,000,000; at 2 per cent, approximately, 
$19,000,000; and at 3 per cent, approximately, $29,000,000. 

The estimate of the yield from the individual income tax at 
the rates contained in the attached bill is as follows : 

1916 $18,000,000, approximately 

19 1 7 19,000,000, approximately 

From these amounts would have to be deducted, however, 
the present revenue derived under section 182 from the corpo- 
rations that would be subject to the income tax, which corpo- 
rations, by the terms of the attached bill, would be relieved 
from payments under section 182. The state would then, out 
of the total amount collected, retain a little over $2,000,000, plus 
the cost of administration; and the balance, under the terms of 
the bill, would be returned to the localities. This balance, in 
1917, would amount to over $44,000,000. In considering the net 
gain to the localities over the present system, we would have 
to take into consideration the loss of approximately $6,000,000, 
at present derived from the personal property tax. After allow- 
ing for all these deductions there would still be a net gain of 
$38,000,000, to be distributed to the localities with a view to 
equalizing the present burden of taxation by relieving real estate 
and such other forms of wealth as are now contributing more 
than their share. We give in the appendix a table showing 
the amount which would be received by each county if the 
$38,000,000 were distributed on the basis of the assessed values 
of real estate for the year 1914. This table shows beyond any 
question that there is not a coun*y in the state that would not be 
infinitely better off than it is today. 

The suggested method of distribution according to assessed 
values in each county is novel, but it has these advantages : 



TAXATION 287 

i. It will avoid the difficulty which would arise if each 
locality were permitted to retain the tax paid by residents of 
that district. Under this latter method some districts, where 
many rich men have established a residence, or where many 
prosperous corporations are located, would have more revenue 
than they could use, while others, whose inhabitants enjoy 
smaller incomes, would receive little or no revenue. 

2. The new method will tend to encourage the raising of 
real estate assessments to a point approaching true value. 

3. It will meet the criticism made of an income tax to the 
effect that, although the rate is usually low at the start, there 
is a constant temptation to raise it in order to obtain more 
revenue. Under the proposed system there will be no temptation 
on the part of the Legislature to raise the rate, inasmuch as the 
state will not profit, while it is hardly probable that all of the 
localities, or even a majority of them, will unite at one time 
in demanding an increase, or at least such a situation will not 
occur unless the increase is fully warranted by the general cir- 
cumstances. 

It is sometimes said that the income tax is inquisitorial, but 
it will be noted that the bill hereto attached makes it possible 
for the taxpayer to file with the State authorities a return which 
is, for all practical purposes, a duplicate of the information 
already furnished to the Federal government, together with such 
additional information as may be necessary for state purposes. 
We hear little or no complaint today as to the inquisitorial fea- 
tures of the Federal income tax. People have become ac- 
customed to it. Nor do we feel that there will be any great re- 
luctance to disclose to the state authorities information already 
furnished by the Federal government, particularly under a law 
which provides severe penalties for the disclosure of any infor- 
mation by the public officers. 

Again others object to a state income tax on the ground that 
there is already a Federal income tax. But let us analyze the 
objection. There is no question that, in addition to the Federal 
income tax, personal property must contribute its quota to the 
support of the state government. Is it better to impose a 2 per 
cent property tax on capital value, or to impose a 2 per cent tax 
on net income? We can hardly assume that the state will con- 
tinue to allow the personal property tax to remain on the statute 
books and to permit its evasion. And so the choice does not lie 
between no tax and some new form of taxation such as the 



288 SELECTED ARTICLES 

income tax, but between a continuance of the present hopeless 
system, and some better and more equitable way of raising 
revenue. If such a latter plan can be devised, are we to reject 
it because it is already employed by the Federal government, 
and in order to avoid duplication, continue to tax the same 
property in a manner which we admit ourselves to be inequitable, 
and to be a failure? 

Finally, it is often said, that while theoretically sound, the 
income tax will not work in practice. This may have been true 
prior to the enactment of the Federal Income Tax Law, but this 
law is of immense help to any state desiring to impose an in- 
come tax; and for two reasons. In the first place, many people 
are already accustomed to it, they understand its workings and 
will not resist its enforcement; and in the second place, the fact 
that the Federal government requires a return, and has the ma- 
chinery to check up that return in a strictly accurate manner, 
makes the evasion of the state income tax a matter of no little 
difficulty and danger. In so far as corporations are concerned, 
the Federal law today permits a state to examine the returns. 
A similar provision in so far as individuals are concerned, could 
probably be obtained from the Federal government. But in the 
meanwhile it seems to us highly doubtful whether any individual 
having already filed a correct statement with the Federal gov- 
ernment would be foolhardy enough to file an incorrect dupli- 
cate with the state authorities. 

The income tax will work in practice. It has been success- 
fully administered in practically every European country for a 
great number of years. The Federal income tax works, and 
the Wisconsin experiment has conclusively demonstrated that 
with a good administration a state income tax does work. There 
seems to be, moreover, a strong movement in favor of such a 
tax throughout the country. Connecticut and West Virginia 
both adopted an income tax, in so far as corporations are con- 
cerned, last winter, while the people of Massachusetts, by a vote 
of almost three to one, adopted at the last election an amend- 
ment which permits the imposition of such a tax in the state of 
Massachusetts. Practically every witness that appeared before 
our Committee — and the list included representatives of leading 
commercial and business organizations, as well as tax experts, 
business men and individuals from many walks of life — advo- 
cated the abolition of the personal property tax and the substi- 
tution therefore of the income tax. 



TAXATION 289 



THE INCOME TAX 1 

No question before the Convention is as misunderstood as is 
this form of taxation. Some oppose it on the ground that taxes 
are high enough at present, and, consequently, should not be 
further increased. This, of course, is a fallacious line of reason- 
ing, and entirely omits those practical aspects of the question 
that should receive the serious consideration of all thoughtful 
men. We are not, moreover, attempting to increase taxes ; we 
are as much interested in seeing them reduced, if possible, as any- 
one else is; but what we are endeavoring to do is to solve the 
question of an equitable distribution of the present burdens that 
the people themselves have voluntarily assumed. 

The income tax is denned by Thomas E. Lyons, a member of 
the "Wisconsin Tax Commission, as follows : 

An income tax is a direct levy by a government upon the income of 
individual citizens whether that income is received from labor, industry, 
investment, real estate or any other source, computed annually or at 
stated intervals, — Bliss Encyclopedia of Social Reform, 600. It is in effect 
a tax based upon and measured by the earnings of person or property, 
or of both combined. 

Income taxes differ from property taxes which are either imposed 
upon property direct and become a lien thereon, as in the case of real 
estate, or are made a charge against the person by reason of ownership, 
as in the case of personal property, regardless of productiveness except 
as that element may be reflected in market value. They differ from 
occupation and other excise taxes which are exactions for engaging in 
particular lines of business or in an ordinary line of business in a 
particular way; and they differ from consumption taxes, which are meas- 
ured by expenditure. 

Income taxes are not levied upon property nor upon the operations 
of trade and business, or the persons employed therein; nor upon the 
practice of a profession or the pursuit of a trade or calling. They are 
taxes levied upon the acquisitions arising from one or more of these 
sources. Ordinarily the tax is based upon the excess of such acquisition 
for a given period over a certain minimum sum called an exemption. 
They are, therefore, taxes upon the periodical accretions produced by 
personal effort or from the use or disposition of property or of all these 
combined. 

It is also contended that this is a source of revenue which 
has been "pre-empted" by the Federal Government, and should 
not, therefore, be touched by the state. Such a contention has 
no foundation either in theory or fact. We believe that it is a 
well understood fact among all tax authorities and financiers 
that a tax on income is not an independent source of revenue — 
there can be only one source of revenue, ordinarily speaking, 
and that is income, out of which all taxes of whatever nature are 

1 Report of the Louisiana Assessment and Taxation Commission to the 
Constitutional Convention. 1921. p. 33-48. 



2go SELECTED ARTICLES 

paid — and the income tax is but a method of determining, just 
as the general property tax attempts to determine, how much 
each citizen should contribute to the support of the government. 
The Assessment and Taxation Commission of the Province 
of Manitoba, in its report, made in 1919, on that phase of the 
question in the Dominion of Canada, said : 

The objection taken by some witnesses before this Commission to the 
adoption of a Provincial Income Tax in Manitoba for municipal pur- 
poses, that it would compete with the Dominion Income Tax, and so 
lessen its productiveness, rests on a singular misapprehension. The 
sources of tax revenue are not watertight compartments. Every tax, 
whether Federal, Provincial, or Municipal, imposed directly on the income, 
taxpaying classes, or indirectly shifted by competition to them, so far 
tends to lessen the income on which taxation can be levied. For all taxes 
fall on persons, though in many cases nominally imposed on things; all 
are in the long run open or disguised income taxes. Indeed most taxes 
take more out of income than if they are levied directly on it. An 
income tax in this respect differs fundamentally from a tax on a par- 
ticular commodity. 

In "The Science of Finance," by Professor Adams of the 
University of Michigan, we find the following : 

Speaking analytically, all taxes must be paid out of income, and if 
properly understood, out of net income. The word income needs no 
further definition than that implied in the definition of a tax already 
given, which asserts that a tax is a derivative revenue. The rent, the 
royalty, the interest, the dividends, the profit, the salary, the wages — 
these are ail funds which, according to the phraseology of contracts, 
stand for income. It thus appears that an income is a sum of money 
which comes in to an individual or corporation during a definite period 
of industrial activity. We may assume this period to be the year. It 
is then the amount which during the year will come to be at the disposal 
of the citizen, and which may be used in current expenditures or in an 
extension of investments. From the individual point of view, therefore, 
it is the net income and not the gross income to which the state must 
appeal. It is the income that limits domestic expenditure, and not the 
income that measures the volume of business, that must be made the 
sources of payment to the state. The phrase gross income cannot prop- 
erly be employed except for a business which has operating expenses. To 
accept gross income as the measure of the possible expenditures for con- 
sumption in any direction whatever has been the first step to the ruin 
of many a business man. A tax, therefore, whether in the form of an 
income tax, a property tax, or any kind of a tax whatever, must, so 
far as the individual is concerned, come from the net income, for the 
same reason that rent or payment of the grocer must come from that 
fund. This is in harmony with the idea entertained throughout this 
treatise, that a tax is, or at least should be, a necessary item in every 
domestic budget. It is true that a tax may be paid out of the saved in- 
come of past years; but such a practice could not be followed very long 
without ruin, and on this account the contingency is not recognized in 
the discussion which assumes an annual payment in perpetuity. The rev- 
enue of a state must flow from the product of current industry, and in 
so far as the state permits this product to be distributed among pro- 
ducers before it demands its share (that is to say, in the case of derivative 
as distinguished from direct revenue') the fund from which this revenue 
is derived must be a net revenue of citizens. 

A tax on income is a very simple tax both in legislative form and 
in the reasons urged for its support. In form the law demands the cash 



TAXATION 291 

payment of a certain per cent of the annual clear income of each citizen. 
The payment is supposed to rest where the charge is placed, and in the 
vast number of instances this will be the case. Assuming the ability to 
pay to be the just measure of payment, income is accepted as the surest 
test of ability. In years when business is prosperous the payment would 
be large; in years of depression the payment would be small. From the 
point of view of the citizen nothing could be more considerate and no 
tax more easily borne. The demand of the state would increase or de- 
crease as the fund from which the payment is made increases or de- 
creases. This is not presented as an argument either for or against an 
income tax, but rather, to show the simplicity of the idea underlying it. 
Speaking logically (not historically), the income tax is the original tax, 
and all other taxes are complementary to or a substitute for this tax in 
those points in which it is difficult of application; for this assumption at 
least permits the student to appreciate most easily and naturally the re- 
lation existing between the various sorts of taxes. 

Income taxation, it must be conceded, is no new or untried 
form of raising revenue for public purposes. It is now in suc- 
cessful operation in, and has been permanently adopted as a 
part of the fiscal system of, nearly all of the European countries, 
several of the states and the Federal Government of the Amer- 
ican Union. Wisconsin was one of the first states to adopt an 
income tax ; and, in 1912, the Tax Commission of Minnesota, 
desiring to recommend the adoption of an income tax for that 
state, made a complete and thorough investigation of the Wis- 
consin system. We quote from their 1912 report, at page 159: 

Results of the First Year 

In point of revenue the income tax law in Wisconsin has in its first 
year more than met the expectations of its advocates. The income tax 
assessed this year will exceed $3,000,000. This is quite a remarkable 
showing for the first year, especially when compared with results obtained 
in other states that have experimented with similar laws. It even exceeds 
the amount collected under the first federal income tax law in 1863 by 
more than $550,000, although that law applied to the entire country. 

Of the total tax, corporations will contribute about $2,200,000, or 
nearly 66 Mj per cent of the total, and individuals and firms about 
$1,100,000, or 33% per cent of the total tax. It is estimated that the 
average rate on corporations will be between 5 and 6 per cent, while 
the rate on individuals and firms will be slightly in excess of 2 per cent. 

The preceding figures represent the total income tax assessed from 
which, of course, a very considerable deduction will be made for taxes 
paid on personal property. No accurate data is yet available as to how 
much this offset will be, but from investigations already made it is esti- 
mated that the net tax on individuals will be about 80 per cent, and on 
corporations about 50 per cent of the total income tax assessed. On this 
basis the income tax will yield net above the personalty offset about 
$1,980,000, of which amount the state will receive $198,000, the counties 
$396,000, and the towns, cities and villages $1,387,000. These amounts 
represent clear gains in public revenues resulting from the income tax 
law. 

The advocates of the income tax have always contended that even- 
tually such a tax would enable the state to exempt personal property 
from taxation, except public utilities and banks, without impairing the 
public revenues. This could almost be done the first year. The entire 
tax levied on personal property this year is estimated to yield about 



292 SELECTED ARTICLES 

$4,100,000, an amount only about $800,000 in excess of the income tax. 
It is not improbable that within the next two or three years the per- 
sonal property tax with the exceptions above indicated, could be entirely 
abolished without any diminution in the public revenues. 

Distribution of the Tax Burden Under the Income Tax 

A study of the amount of income tax assessed against individuals in 
urban and rural districts shows, as would be expected, that the income 
tax per person assessed is much larger in cities than in the rural districts. 
There were 45.638 persons, exclusive of corporations, assessed for income 
in the state, the average tax being $24.33. Dividing the seventy-one 
counties of the state into two groups, the first embracing seventeen coun- 
ties containing all of the cities of the first, second and third classes, and 
the second the remaining fifty-four counties containing a large percentage 
of rural population, we find that in the former the average tax is $27.73 
per taxpayer, while in the second class the average is $15.20 per tax- 
payer. Basing the tax on population, the difference between the two 
groups is still greater, the former paying 76^c. and the latter i6%c. per 
capita. 

An analysis of the income tax assessment in five selected counties — ■ 
Dodge, Chippewa, Rusk, Marathon and Dane — discloses some interesting 
data on the distribution of the tax burden under an income tax. The 
total amount assessed in these five counties amounts to $250,571. The 
offset for personal property taxes, based on 191 1, will amount to $101,242, 
leaving a net income tax of $149,329. Of this amount corporations will 
contribute $93,172, or 62.4 per cent, and firms and individuals $56,157, 
or 37.6 per cent. Dividing the 37.6 per cent paid by others than cor- 
porations, we find that the increase over personal property taxes will be 
less than 1 per cent for the farmers assessed for income, about 3% per 
cent for merchants, 8 per cent for manufacturers, and a little over n 
per cent for the professional classes, as compared with the 62.4 per cent 
paid by corporations. 

A comparison of the average income tax of each individual taxpayer 
with the average personal property tax paid last year in the different in- 
come classes in the same group of counties is equally interesting. The total 
number of income assessments in this group of counties is five thousand, 
one hundred sixty. The average income tax in the group is approxi- 
mately $49 per individual taxpayer. Last year the average personal prop- 
erty tax was $37 per taxpayer, showing an average increase of $12 per 
person on income over personal property taxes. The greater part of this 
increase, however, is on incomes of $3,000 and over. In other words, 
the increase falls on those able to pay — on the rich rather than on the 
poor. For example, those having no taxable income would pay nothing 
if personal property taxes were abolished; those having taxable incomes 
of less than $1,000 would pav $2 less than they are now paying in per- 
sonal property taxes, while those having taxable incomes under $2,000 
would pay approximately the same as they are now paying. The in- 
crease on incomes under $3,000 would be about $5; on incomes under 
$4,000 the increase would be $68, while on incomes of $10,000 and over 
the increase would exceed $600. These are significant figures and indi- 
cate that if income is the correct measure of ability to pay, the Wis- 
consin income tax law is working admirably in this group of counties. 

Cost of Administration 

The cost of making the income tax assessment will be less than $90,000 
this year. This is a low figure when it is considered that any new 
system of taxation is generally more costly in administration the first 
than in subsequent years because of the extra expense incident to the 
inauguration of new taxing machinery. The net cost, however, will be 
much less than the above figures would indicate. In addition to assessing 
incomes the income tax assessors also perform the duties formerly en- 
trusted to the supervisors of assessment, the latter office having been 
abolished. This in itself is a strong feature of the new law and has re- 
sulted in a decided improvement in the assessment of the general property 



TAXATION 293 

of the state. This change effects a saving of about $55,000 in salaries, 
leaving the net cost of the income tax assessment about $35,000, or a 
trifle over 1 per cent of tbe yield. 

Centralized Administration the Strong Feature of the Law 

Centralized administration is the strong feature of the Wisconsin in- 
come tax law and much of its success is undoubtedly due to this im- 
portant provision. It is also strong in many other features not heretofore 
included in the income tax laws of other states. They are thus sum- 
marized by a member of the Wisconsin state tax commission: 

"In the minds of practically everybody connected with the adminis- 
tration of the Wisconsin tax, three more or less novel conclusions have 
been established beyond reasonable doubt. 

"First, the American taxpayer is honest and will tell the truth pro- 
vided you take the trouble to ask him direct questions and provided the 
rate of taxation is reasonable and not — as the ordinary property tax rate 
is on securities — confiscatory. The maximum rate under the Wisconsin 
income tax is 6 per cent, whereas the old property tax frequently took 
from 20 to 60 per cent of the net income from credits when by some 
unhappy chance the assessor happened to find them. 

"And the Wisconsin assessors have asked specific and direct ques- 
tions. These assessors themselves constitute a new phenomena in American 
financial history. They were selected through the Wisconsin Civil Service 
Commission after tests based on merit and efficiency alone; they hold 
office practically during good behavior; they are paid fair though not 
generous salaries; and they give practically their entire time to the work. 
Nothing was known of their politics before their appointment by the state 
tax commission, but enough is known now to say that there are among 
the assessors republicans, democrats, socialists and prohibitionists. They 
work under the control and direction of the state tax commission. So 
long as they do their work fearlessly, impartially and tactfully they will 
keep their places legardless of politics. 

"The second conviction noted above is simply that the idea of col- 
lection at source has been greatly exaggerated. A very large majority of 
the stockholders of the corporations represented in any state live in the 
state. With respect to these the tax can be collected at the source. More- 
over, every corporation doing business in a state can be, and in Wis- 
consin has been, asked to report ail the stockholders and salaried em- 
ployees living in Wisconsin with the dividends and salaries paid to them, 
respectively. Furthermore, corporation bonds may be defined as an in- 
terest in the business and the tax is collected directly from the corporation, 
the corporation being authorized to deduct the tax from the interest when 
it has not covenanted to pay the tax itself. This has been done in Wis- 
consin. The remaining forms of income will be taken care of by the 
honesty of the average taxpayer when the rate is reasonable. 

"This surprising notion of the honesty of the taxpayer is not mere 
sentimentalism and not mere buncombe. It is completely borne out by 
the facts. The impression of practically everybody connected with the 
administration of the Wisconsin income tax is that more than 90 per cent 
of the net income theoretically taxable under the Wisconsin law has been 
voluntarily- returned. Border line questions have in many cases been 
decided in favor of the taxpayer, and there has been considerable uncer- 
tainty about difficult, doubtful points, but in the large majority of in- 
stances attention has been voluntarily directed to these points, and almost 
never has any attempt to conceal the facts been encountered when the 
taxpayer was questioned. The assessors did not predict this; they did 
not expect it; but they now know it. 

"The third novel conclusion is that a state income has, as contrasted 
with the federal income tax, more natural advantages than" disadvantages. 
It may have where properly administered, and does have in Wisconsin, 
ten times the local knowledge because it can have ten times the number 
of assessors by combining the machinery of the general tax system with 
the machinery of rhe income tax. In literally hundreds of cases the 
writer has discovered that reports under the Wisconsin income tax were 
more carefully made than under the federal corporation excise tax and 



294 SELECTED ARTICLES 

fewer doubtful questions decided in favor of the taxpayer. In Wis- 
consin taxpayer A is used to check the accuracy of taxpayer B. What 
is outgo to B is income to A. B is asked to tell with respect to certain 
important items of outgo the names and addresses of the recipients. There 
is thus a cross-check of which the Federal Government could probably 
not avail itself. In any event, the writer feels certain that the assessment 
rolls of Wisconsin now record a higher percentage of actual taxable in- 
come than the Federal Government has on that part of its records which 
cover the same taxpayers. 

". . . The great majority of the people of Wisconsin are more than 
satisfied with the income tax and if it is repealed it will be due to general 
political complications, not to dissatisfaction with the operation of the law 
itself. Moreover, the state income tax has come to stay. Wisconsin 
itself is not naturally particularly good soil for the income tax, which 
thrives best in urban and thickly populated communities. If Wisconsin 
can do so well with the tax, urban states like Massachusetts, Connecticut, 
Ehode Island and the like could do infinitely better. Let one such com- 
monwealth try the state income tax and its possibilities will cease to be 
a matter of dispute. It will spread like wildfire." 

Conclusions 

That the Wisconsin income tax law has been a remarkable success 
for the first year is now generally admitted. Not only has it resulted in a 
large increase in revenue, but it has unquestionably distributed the tax 
burdens more equitably among those able to bear them than ever before 
in the history of the state. Under its provisions a considerable amount 
of the public revenue will come from people of large incomes, many of 
whom have heretofore contributed but little to the expense of govern- 
ment. If income furnishes the proper measure of the taxable capacity 
of people, the Wisconsin income tax law is a long step in the direction 
of greater justice in taxation. 

Nevertheless, while the success of Wisconsin in its first year's ex- 
perience with a state income tax has far exceeded the expectations of its 
advocates, yet it could scarcely be claimed that one year is sufficient time 
in which to fully test out an old principle of taxation clothed in new ad- 
ministrative machinery. A more extended experience will probably sug- 
gest a number of desirable changes in the law to make it fit the indus- 
trial and social conditions of the state. Its ultimate success, however, is 
full of promise. Minnesota, in common with other states, will watch 
with interest the experience of Wisconsin with its new law, and if suc- 
cessful as we believe it will be, this state may eventually follow the ex- 
ample of its sister state by incorporating an income tax law into its 
revenue system. 

The ultimate results of the income tax in Wisconsin have 
even exceeded the expectations of its advocates in that state and 
in Minnesota. In 1920 the State of Wisconsin levied approxi- 
mately $12,000,000 on incomes, and as the personal property 
off-set amounted to $5,000,000, the net yield of the income tax 
for that year amounted to $7,000,000. Ten per cent of this 
amount was retained by the state and the remainder was allo- 
cated to the various districts and local subdivisions. 

The Manitoba Commission also advances the opinion that : 

In theory we believe this principle of taxation is both attractive and 
necessary. Any system which exacts payment from those that have the 
means to pay, relieves those that have not, taxes moderate incomes 
lightly and large incomes more heavily, makes strong appeal for popular 
favor, and has much to commend it on the economic side. The income 
tax principle was applied in Florence in the fifteenth century, and in 



TAXATION 295 

France throughout the eighteenth century. In 1779 it was adopted in 
England, and though discontinued after the close of the war with Na- 
poleon, it was reintroduced by Sir Robert Peel in 1842. England's example 
has since been followed by practically all the leading nations of the 
world. It has also been introduced, as previously observed, in many of 
the American states, and is also in use in the Canadian provinces of 
Ontario, British Columbia and Prince Edward Island in certain degrees. 
It will, therefore, be appreciated that our recommendation for its intro- 
duction in Manitoba is not based upon a hypothetical foundation. 

Honorable Thomas E. Lyons, in address delivered at the 
Blackstone Institute, in 1916, said, with respect to the operation 
of the income tax in Wisconsin, that : 

The conventional criticism of the income tax is that it is all right 
in theory but will not work in practice. If this criticism is well founded 
it constitutes a fatal objection to this form of taxation. In last analysis 
a fiscal system must be tested by results, and the important question is 
how the income tax actually operates in practice. The first and most 
obvious test of a tax system is its power to produce revenue, and the in- 
come tax has completely met this test. This is shown by the fact that 
the yield of the tax in England and Germany before the present war 
broke out exceeded $200,000,000 annually in each country. The assess- 
ment of 19 15 income by the Internal Revenue Department at the rela- 
tively low rates prescribed by the act of 19 13 resulted in a tax of $124,- 
937,252. In Wisconsin the assessment of incomes for the same year 
produced a tax of $5,344,303. It is estimated that the average annual in- 
come of the people of the United States from all sources is over $30,- 
000,000,000 and that 20 per cent of the heads of families receive 47 per 
cent of this amount and that 2 per cent of them receive more than 20 
per cent of it. — King's Wealth and Income, 132. The Internal Revenue 
Department reports that one hundred twenty persons in the United States 
received an income of more than $1,000,000 each in 1915 and that the 
aggregate taxable income assessed for that year was $8,703,068,389. These 
figures amply demonstrate the possibilities of this form of taxation as a 
revenue producer. 

A Tax on Wealth 

A study of the returns under income tax laws conclusively shows that 
the income tax is a tax on the rich and well-to-do. The liberal exemp- 
tions allowed by the Federal law exclude the great bulk of the population 
from its operation. According to the report of the Internal Revenue De- 
partment, only about % of 1 per cent of the population is subject to the 
tax. In Wisconsin, with lower exemptions, less than 3 per cent of the 
population come within the law. Further analysis of the returns indi- 
cates that the limited number receiving large incomes pay most of the 
tax. Thus three hundred twenty-nine out of a total of 366,443 persons 
assessed under the Federal income tax law in 19 16 paid about one-fifth 
of the total tax. In Wisconsin sixty-two persons receiving an income of 
over $50,000 each paid 23 per cent of the tax assessed against individuals, 
and fourteen out of an aggregate of 62,272 taxpayers representing only 
1/200 of 1 per cent of the total number paid over 12 per cent of the 
tax. In the county of Dane, in which the capital is located, three indi- 
viduals receiving an income of over $25,000 each paid one and one-half 
times as much tax as the two thousand, two hundred fifty persons having 
less than $1,000 income apiece. 

Where the earnings of corporations are assessed at the full progressive 
rate as in Wisconsin, they pay the bulk of the tax. The aggregate tax 
assessed under the Wisconsin law on 19 15 income was $5,344,393, and 
of this amount corporations were assessed for $3,473,180, or 70 per cent 
of the total. While corporations paid only the normal rate of 1 per cent 
prescribed by the Federal law of 1913. their aggregate tax, according 
to the last assessment, was $56,993,658, or about 45 per cent of the total. 
If the income of _ these corporations had been subject to the full tax 
prescribed for individuals under the same act, the yield would probably 



296 SELECTED ARTICLES 

have been five times that amount. The total number of corporations 
assessed in Dane County for income of 19 15 was three hundred thirty- 
four, and the total tax thereon $133,939, and one corporation engaged in 
the production of war material paid $67,642, or more than one-half of this 
total. As enterprises of this character are generally located in cities, it 
follows as a corollary that the yield of the income tax is primarily de- 
rived from urban centers. The liberal exemptions and relatively small 
income received by agricultural classes practically exempt them from the 
operation of the law. 

Objections to Income Tax 

Complaint is often heard that the income tax is a class tax for the 
reason that so small a part of the population pays such a large proportion 
of the yield. But every other tax is subject to this criticism, in greater 
or less degree. The general property tax reaches only the comparatively 
small part of the population owning property. Privilege and occupation 
taxes apply only to those exercising the privilege or following the par- 
ticular occupation subject to the law. The inheritance tax is confined 
to those who die leaving a substantial amount of property, and even the 
poll tax is limited to male adults of certain ages. The test of a tax is 
not whether it reaches the entire population but whether it applies equally 
to all persons similarly situated. The income tax satisfies this requirement 
by applying the same rate and imposing the same burden upon all persons 
who have the same income. The fact that those who have large incomes 
pay a larger tax is readily justified by their greater ability to pay and 
the greater sacrifice involved in the payment of a tax by these who have 
small incomes. Moreover, in the face of increasing public expenditure 
and growing demand for public revenue, it is not apparent why those 
engaged in business yielding returns should not make corresponding con- 
tributions to the support of government. The income tax is. the only one 
that reaches all classes of excess earnings. 

Objection is often made that an income tax law is inquisitorial, but 
so are all tax laws when properly administered. Under the property tax 
law the assessor may examine the taxpayer and call his neighbors to 
testify as to the amount and value of his property. He may even dis- 
regard the taxpayer's sworn statement and increase the assessment as 
justice may require. According to a recent bulletin of the Federal Cen- 
sus Bureau, the cost of government throughout the United States _ has 
practically doubled within the last ten years, and there is little to indi- 
cate that the maximum has yet been reached. In the face of these 
mounting public burdens, taxes will be imposed in one form or another, 
and the public will insist upon the necessary information to measure 
the amount chargeable to each citizen. Concealment and evasion will not 
permanently prevail. The choice lies between a flexible and adjustable 
system and a rigid and mechanical one, with a long train of injustice 
in its wake. 



Congress, stated that: 

During recent years there has been a general agitation and demand 
in almost every state in the Union and in almost every country in the 
world for intelligent, fair and practical reforms and readjustments of 
their tax systems to the end that every citizen may be required to con- 
tribute to the wants of the government in proportion to the revenue he 
enjoys under its protection. To this end the doctrine of equality of 
sacrifice or ability to pay is being universally invoked. 

We believe that any income tax adopted by Louisiana should 
carry liberal exemptions. A citizen should be first permitted to 
earn enough to support his family before being called upon to 



TAXATION 297 

contribute to the government under an income tax. In Wiscon- 
sin the exemption is $800 for single persons and $1,200 for mar- 
ried persons. In Massachusetts, which has a classified income 
tax, there is an exemption of $300 on Classes A and B, represent- 
ing income from interest or dividends from certain intangibles 
and annuities, providing the total income from all sources does 
not exceed $600; on Class C, covering profits over losses arising 
from the sale of intangibles, no exemption is allowed; but on 
Class D there is an exemption of $2,000 (with possible further 
exemption not exceeding $1,000) on income derived from 
salaries, business and professional income. The New York in- 
come tax exemptions are the same as those allowed by the 
Federal Government, viz., $1,000 for a single person and $2,000 
for a married person. 

This theory of exemption has been incorporated in ever}' 
system of income taxation, and is supported by Professor Adams, 
in the following language : 

The duty of the financier is not limited to the getting of revenue, 
but he is obliged to get revenue in such a manner that the source from 
which it is derived shall never be exhausted. He must hold in mind the 
needs of the future as well as of the present, and is therefore debarred 
from employing the taxing power in such a manner as to dry up the 
springs of present revenue or to hinder the development of an enlarged 
supply. 

One of the most common facts in connection with modern systems 
of taxation is the exemption of incomes and property below a certain 
amount, and many financiers justify this exemption on social consider- 
ations. It is not right, they say, to call upon a citizen to contribute to 
the budget of the state until the necessary domestic budget has been 
provided for. Without admitting any man's right to live in the modern 
state without contributing to its support, a modified application of this 
principle may be defended on purely fiscal grounds. The surest source 
of public wealth is a lively hope and a healthy expectation on the part 
of the great body of citizens, and in so far as exemption of low incomes 
and small salaries from taxation induces to the conditions from which 
this hope springs, such exemptions will tend to the expansion of a na- 
tion's wealth. If this be true the exemption of small incomes from 
direct taxation, as ;-.lso of the property of those who relatively are poorly 
able to pay for the support of the state must ultimately result in the 
development of a source of wealth from which the state may expect an 
increased revenue. 

Senator Ogden L. Mills, a prominent lawyer of New York, 
and President of the New r York Tax Association in an address 
delivered by him to that organization, observed that : 

The income tax is the fairest kind of tax, because it taxes every man 
in accordance with his ability to pav. Taxes are paid out of income, 
and the income which a man enjoys is the fairest test that can be devised 
of his ability to contribute his share to the cost of government. A man 
who has made an unfortunate investment, or who owns a new business 
which has produced and made no return, is not in as good a position 



29 8 SELECTED ARTICLES 

to pay taxes as the lawyer or professional man earning a large income, 
and yet the former, under a property tax, is obliged to contribute, while 
the latter escapes entirely. The income tax is the only tax that will reach 
the professional and salaried classes who enjoy big incomes which are 
today tax exempt. 

It is stated in the report of the Special Commission of Ne- 
braska that: 

The merits of the income tax are unquestioned. Among peoples well 
advanced industrially, it is an essential aid in bringing about an equitable 
apportionment of the tax burden, (i) As a test of ability, it is a fairer 
basis than the value of property upon which the property tax rests, for 
the reasons pointed out elsewhere, that all kinds of property are not 
equally productive and not equally indicative of the ability of the citizen 
to pay taxes. (2) In the second place, it is needed to reach that con- 
siderable class of persons in each community who enjoy an income out 
of all proportion to the property owned. And in the third place, it is 
desirable as a substitute for the troublesome personal property tax. 

Professor Charles J. Bullock, in reply to a direct request by 
the Chairman of the Manitoba Commission, expressed the fol- 
lowing opinion with respect to the personal income tax: 

A personal income tax ought to be adopted in your Province whenever 
public opinion is ripe for it. It is the best tax which you can levy as a 
supplement to your tax on real estate, and I think it probable that in 
time most of the Canadian provinces and American states will come 
to adopt it. Whether the time has yet come in Manitoba, I am not 
able to judge. The tax ought not to be adopted unless the people are 
willing to favor adequate machinery for enforcing the tax, and are ready 
to accept it as a reasonable method in determining their liability for the 
support of government. The operation of the income tax depends wholly 
upon the conditions in which it is levied. With poor administration, ex- 
cessive rates, and a hostile public opinion, an income tax becomes a mere 
tax on honesty, while under opposite conditions it can be enforced with 
substantial certainty and justice, and as successfully as most other laws. 
Some evasion there will be, necessarily, but it is possible for an income 
tax to be so drafted and administered as to command public favor and 
reduce the amount of evasion to a reasonable minimum. Wisconsin has 
already shown that with proper methods of administration, a reasonable 
income tax can be collected with substantial certainty and completeness; 
and against Wisconsin's evidence, the experiences elsewhere under very 
opposite conditions count for little or nothing. 

And Professor Adams of Yale University said, in a com- 
munication to the same Commission, that : 

The literature on the subject of the personal Income Tax is now so 
vast, American opinion now so nearly unanimous and the results of 
American experience so nearly conclusive — at least for the United States — 
that extended discussion seems unnecessary. The state of provincial in- 
come tax is now a demonstrated success. 

The Manitoba Commission recommended the adoption of a 
progressive income tax, and approved an exemption of $1,000 for 
unmarried persons and $1,500 for married persons, with a fur- 
ther exemption for each child or dependent of $200. The Com- 
mission further "recommended that the administration of any 



TAXATION 299 

income tax law that may be enacted be wholly administered by 
the Tax Commission, save that the tax collections be made by 
the local authorities." 

The members of our Commission think that a differentiation 
should be made between earned and unearned incomes. This 
principle has long been recognized in Great Britain, and the 
Royal Commission on the Income Tax, in an exhaustive report 
submitted to Parliament in 1920, stated that : 

Differentiation is the term used to express the discrimination that is 
made for Income Tax purposes between incomes that are earned by 
personal exertion and incomes that are not so earned. We are satisfied 
that some such discrimination is desirable and just. Although recognition 
of the principle was a long time in coming the demand for it is prac- 
tically as old as the tax itself. We have not had much evidence ad- 
vanced against the principle of differentiation, and we are convinced that 
to do away with the advantage which since 1907 has been granted (within 
certain limits) to incomes earned by personal exertion would be a dis- 
tinctly retrograde step, and would ignore the deeply-rooted conviction 
which undoubtedly exists in the public mind that there is a real difference 
in taxable ability between the two classes of income in question. 

The application of graduated rates is so well-nigh universal 
that it is hardly a debatable, question in the majority of coun- 
tries and states that have adopted the income tax. The Royal 
Commission thus tersely stated its position on the question of 
"graduation" : 

We do not feel called upon to defend with arguments the principle 
of graduation of the Income Tax. Direct graduation of the tax was bit- 
terly opposed for many years, but it is now almost universally admitted 
to be as sound in principle as it is imperatively necessary in practice. 
We are therefore concerned more with the practical than with the the- 
oretical aspect of the subject — not so much with the principle as the means 
by which that principle can be translated into practice. 



So long therefore as it is necessary to depend on the Income Tax for 
a great part of the revenue, and so long as there is an exempt margin 
of income, an abatement appears to be essential. That being so, we have 
the choice (a) of giving to all incomes the abatement necessary in the 
case of smaller ones, and of effecting further graduation by other means; 
or (b) of complicating the system by diminishing the abatements at certain 
limits of income and finally extinguishing them as is done at present. 

As stated elsewhere in this report, in recommending the 
adoption of an income tax, we contemplate the exemption from 
taxation of certain kinds of tangible and intangible personal 
property, among which may be mentioned: Credits of all kinds, 
such as open accounts, promissory notes, franchises, the capital 
stock of banks; household property, diamonds and jewelry, busi- 
ness furniture and fixtures, and agricultural tools and imple- 
ments. 



300 SELECTED ARTICLES 

Experience has taught us that it is physically impossible to 
ever place all of this class of property on the assessment roll, 
regardless of how stringent or efficient the administration may 
be ; without, of course, hiring a horde of tax officials, the so- 
called "ferret" system of some states, in which case the cost 
of assessing and collecting the tax is more than the amount 
realized in taxes. 



INCOME TAXES 1 

The recent adoption of effective income taxation into this 
country affords an interesting illustration of the triumph of a 
sound economic idea over formidable obstacles. The legal bar- 
riers which had to be surmounted have already been mentioned, 
but there were other difficulties to overcome equally formidable. 
Income taxes had been on the statute books of American com- 
monwealths since the seventeenth century, and had been con- 
sistently and continuously ineffective. The tax was generally be- 
lieved to be too intricate and too inquisitorial for the American 
people, schooled by the crudities of the general property tax to 
evasion of and contempt for tax law. Expert opinion had come 
to hold that the income tax, though "sound in theory," made too 
many demands upon both the taxpayer and the tax administrator 
to thrive in American soil. Yet in the last five years income 
taxes of the European type have been put into successful opera- 
tion by both state and Federal governments and give every 
promise of assuming, in the future, a place of major importance 
in the American fiscal system. 

The mistake of the experts arose rather from an under- 
estimate of the strength of the income tax than from an under- 
estimate of its difficulties. The alleged weaknesses of the in- 
come tax were not imaginary. Experience has shown that it is 
a complex and difficult tax to formulate and administer. Just 
what items of gross income should be included and what losses, 
expenses, and other deductions allowed, are questions which 
bristle with difficulties. Some forms of income are not ex- 
pressed in money and usually escape taxation ; on the other hand, 
it is almost impossible to avoid double taxation, particularly in 
dealing with interest and dividends. The tax has also the diffi- 
culty of being a class tax : the federal income tax touches 

1 Ely, Richard T. et al. Outlines of Economics, p. 720-3. 



TAXATION 301 

directly less than 1 per cent and the Wisconsin income tax 
less than 3 per cent of the respective populations affected. 
The tax is predominantly a city tax and farmers generally es- 
cape; owing to the facts that they usually do not keep books 
and that much of their income does not find expression in terms 
of money; although it must be admitted that relatively few 
farmers receive incomes above the exemption limit. Finally, the 
mixture of "withholding at source" and direct collection, in the 
Federal tax, imposes large and unjust expenses of collection 
upon private taxpayers, complicates the administration of the 
tax, and in some cases leaves the taxpayer to become the sole 
judge of the taxibility of certain items of income and of the 
deductibility of certain losses and expenses. 1 

Despite all these difficulties, however, the income tax has 
succeeded. It is reasonably productive and will become more 
productive as time passes : the federal income tax in 1915 yielded 
a revenue of over $80,000,000, and in 1916 it produced over 
$100,000,000. It is elastic, and can be made more productive by 
simple increase of rates. Above all else, it realizes with reason- 
able success "taxation according to ability." Property taxes 
pay little attention to the ability of the owner of the property. 
They fall upon property as such whether it is free or encumbered 
by debt; they must be paid by the unsuccessful as well as the 
successful ; in lean years as well as fat years. The income tax, 
on the other hand, does not affect the very poor at all; it 
spares the unsuccessful business, the new business in its develop- 
mental stage, and the old established enterprise in times of busi- 
ness depression. Its appeal is thus not only to the humanitarian 
sentiment of the age, but to the common sense of the business 
man. Except when collected at source (when it acts in small 
part like an excise) it is subject to little or no shifting. And, 
unlike the property tax, it grows stronger with age and con- 
tinued use. The countries which have tried the income tax keep 
it; and in the last quarter of the century practically every large 
country in the world which did not already have the income tax 
has introduced it. 

The mistake of the critics in condeming the income tax for 
American use was due very largely to a misinterpretation of the 
failure of the personal property tax. That tax is largely evaded. 

1 A criticism of the federal income tax by a disinterested and com- 
petent committee of the National Tax Association will be found in the 
Proceedings of that association, v. ix. 



302 SELECTED ARTICLES 

The critics inferred from this that American taxpayers are liars 
and would similarly evade an income tax. Experience with the 
income tax has shown, however, that the average American tax- 
payer is honest and will make an honest declaration if the tax 
be equitable and tax officials at the same time firm, competent, 
and considerate. The personal property tax in this country has 
failed, not because the taxpayer is dishonest, but because the 
tax is at times barbarously severe in burden, strikingly un- 
equal in operation, and administered by officials who are fre- 
quently incompetent and out of sympathy with the tax itself. 
Moreover, the income tax is no more complicated than any 
other direct tax involving valuation and assessment. It ap- 
pears to be more complicated than the property tax merely 
because in drafting income tax laws it is customary to anticipate 
all problems of detail and define the proper answer in the 
statute itself; whereas, in property tax laws almost all the diffi- 
cult questions are avoided by laying the tax on the "fair cash" 
or "market value" and leaving the meaning of this term to 
be decided by the judgment of the assessor. In the average 
case, it is easier to determine a man's income with reasonable 
accuracy than it is to determine with the same degree of accu- 
racy what his property is worth. 

Absentee ownership increases with industrial development, 
and much income is now derived from particular jurisdictions 
by persons who reside elsewhere. This leads, in practice, to 
double taxation, as both the jurisdiction in which the recipient 
lives and that in which the income originates are likely to im- 
pose the tax. Such double taxation is reduced as the jurisdic- 
tion is enlarged to which the income tax applies ; and for this 
reason many authorities advocate the exclusive employment of 
the income tax by the Federal Government. If the income tax 
cannot be employed by both state and Federal governments, 
this conclusion is warranted. But we see no reason why the 
states should renounce the income tax and use substitutes which 
are manifestly inferior, merely because the Federal government 
is employing the same tax. Nearly all taxes must be paid out 
of income. The specific tax employed is merely a device for 
distributing the tax. Why, then, should the state employ a poor 
method of distribution, such as that embodied in the personal 
property tax, when it might employ a tax which with substan- 
tial accuracy lays the burden in accordance with ability to pay? 
As a matter of fact, the federal income tax is likely to encourage 



TAXATION 303 

the adoption of state income taxes, because the federal tax 
familiarizes the people with income tax products, and with 
simple modifications a report prepared for the federal govern- 
ment can be used for the state government. We should have, 
not hostility between state and federal administrations, but 
joint and cooperative use of many forms of taxation. 

BRIEF EXCERPTS 

The operation of the general property tax has come to be 
recognized as a grotesque and lamentable failure. William L. 
Garrison, Jr. Survey. 35 ; 475. J a. 22, '16. 

The State or Provincial income tax is now a demonstrated 
success. Thomas S. Adams. Report of the Louisiana Assess- 
ment and Taxation Commission to the Constitutional Convention. 
1921. p. 45. 

We believe that the time has come to enter upon a more 
scientific method of raising revenues for state and locality and 
for the relief of real estate. In this connection, the Commission 
recommends the enactment of a general personal income tax at 
a low rate, which will be a tax on income after it is received 
by the taxpayer based upon the taxable ability of the recipient 
of such income. Annual Report of the New York State Tax 
Commission for 19 18. p. 68-9. 

The income tax is fiscally adequate. Under proper conditions 
it will produce probably more revenue for the state as a whole 
than it is possible 'to obtain from intangibles under the general 
property tax. We may therefore confidently expect to add to 
the state and local revenues by introducing such a tax. The 
necessary condition is the adoption of such a system of property 
taxation as will permit the exemption of intangibles and the 
use of a properly graduated tax on incomes. Harley L. Lutz. 
Report of the Special Joint Taxation Committee of the 83d Ohio 
General Assembly. 1919. p. 124. 

Another common objection is that the existence of an income 
tax in a given state operates as a handicap to business and an 
additional burden on its citizens in competition with rivals in 
states where no such tax exists. But this objection does not 



304 SELECTED ARTICLES 

stand the test of analysis on either theoretical or practical 
grounds. The people of every community must raise whatever 
revenue is required to maintain their own government. Whether 
they use one or many methods of taxation for that purpose is 
wholly immaterial. Report of the Wisconsin Tax Commission. 
1920. p. 52. 

The merits of the income tax are unquestioned. Among 
peoples well advanced industrially it is an essential aid in 
bringing about an equitable apportionment of the tax burden. 
(1) As a test of ability it is a fairer basis than the value of 
property upon which the property tax rests for the reasons 
pointed out elsewhere that all kinds of property are not equallv 
productive and not equally indicative of the ability of the citizen 
to pay taxes. (2) In the second place it is needed to reach that 
considerable class of persons in each community who enjoy an 
income out of all proportion to the property owned. And in 
the third place it is desirable as a substitute for the trouble- 
some personal property tax. Report of the Nebraska Special 
Commission on Revenue and Taxation. 1921. p. 171. 

Recognizing, as we do, that an income tax is perhaps the 
fairest and most equitable method of raising revenue, particularly 
from those classes of property which are the most difficult to 
assess, we are pleased to note that Congress has enacted a law 
which gives those states having an income tax law, upon the 
request of the Governor of the state, access to the data upon 
which the federal income tax is now assessed, so far as it 
affects corporations, and we hope that a similar provision will 
soon be made in that affecting the income of individuals. The 
only reasonable objections to taxation by this method being the 
difficulty and expense attending its administration, and both of 
these having been almost entirely eliminated by the granting 
of the privilege mentioned above, we recommend that Georgia 
get in line by enacting, as soon as the constitutional amendment 
herein provided for will permit, a law providing for taxation on 
an income basis, and at a very low rate. Report of the Special 
Tax Commission for Georgia. 1919. p. 43. 

The conclusions of the Committee with respect to the income 
tax law, as a possible method of relief from the evils of the 
general property tax are: 



TAXATION 305 

(1) That the basic principle of the personal income tax is 
sound and that the income tax is an essential part of any well- 
balanced system of state taxation; (2) that its place in the 
system of taxation for South Carolina is as a supplement to a 
properly classified property tax; (3) that it should be used as 
one of the principal sources of state revenues, so as to leave the 
taxation of property largely to counties and the other local tax- 
ing districts ; (4) that the constitutional provisions requiring 
taxation of all property at a uniform rate affect the application 
of a general income tax law to an extent that makes it inexpedient 
to enact and to attempt to administer the income tax as a part 
of the state's system of taxation at this time. Report of Joint 
Special Committee on Revenue and Taxation. South Carolina. 
1921. p. 97. 

It has been and will be said that while an income tax may 
be all right for national purposes, it is unsuited to and impractic- 
able for individual states. Modern commerce pays little heed to 
state boundaries, and most commercial concerns of any magnitude 
conduct business in more than one state. The difficulty of allo- 
cating this income to the state of its origin is a real one, and 
may be flatly acknowledged. It is not insuperable, however, 
nor is it confined to income taxation alone. The same problem 
arises in the administration of inheritance tax laws and in the 
assessment of interstate railroads and other public utilities 
under the general property tax. It also arises in the regulation 
of public service companies where national and state jurisdic- 
tions conflict, and in administration of pure food laws and other 
exercises of the police power. Although difficult the problem 
has been met in these fields. Recent decisions of the United 
States Supreme Court on assessments made under state income 
tax laws go far to remove this objection, and indicate that the 
principles already established in dealing with interstate problems 
under the property tax, rate regulation and pure food laws will 
be applied to the taxation of incomes. Report of the Wisconsin 
Tax Commission. 1920. p. 52. 






NEGATIVE DISCUSSION 

TAXATION OF INCOMES 1 

In theory an income tax is an ideal one. Much property is 
necessarily carried by citizens of a state that is unproductive, 
and hence yields but little income out of which taxes may be 
paid; while, on the other hand, if the state only demands a part 
of the income actually earned, it works no hardship on its 
citizens. If each man paid taxes according to his income, those 
who have most would pay most, and those who have least would 
pay least. 

But theory and practice do not always harmonize. It is not 
difficult to devise an ideal system of taxation theoretically, but, 
unfortunately, theory often fails in its practical application. 
While it is true that a majority of students of political economy 
advocate the income tax as an ideal system of taxation, it is 
also true that its practical application to the social and indus- 
trial condition of the American people has thus far been a 
failure. 

The taxation of incomes as a source of state revenue is not a 
new theory in state finance. It has been tried in many of the 
American states, and the system still obtains in several of our 
commonwealths. Many European countries have been trying to 
solve the problem of the successful taxation of incomes, and 
while it is not contended that they have succeeded, yet some 
notable advances have been made in that direction. As no 
investigation of this subject would be complete without a study 
of its history in other countries, a brief review of the income tax 
in some of the European countries will be included in this 
chapter. 

The Income Tax in the United States 

The history of the income tax in the United States covers a 
period of nearly two hundred seventy-five }^ears. As early as 

1 Second biennial report of the Minnesota Tax Commission. 19 10. 
p. 156-69. 



3o8 SELECTED ARTICLES 

1634, the colony of Massachusetts Bay provided for a "faculty 
tax," which was in principle the same as an income tax. Other 
colonies followed the example of Massachusetts. The earlier 
history of the tax in the colonies was characterized by indif- 
ferent and unsatisfactory methods both as to determining the 
income of the individual and the collection of the tax. As a 
consequence, the laws were frequently changed, but with little 
apparent improvement. 

We are not concerned, however, with a study of the income 
tax in colonial days, and but little interested in its earlier history 
in some of the states of the Union. The social and industrial 
conditions of the country have undergone such great changes 
in the past four or five decades that a system of taxation fairly 
suited to the conditions existing forty or fifty years ago might 
be entirely unsuited to present conditions. Conclusions, favor- 
able or otherwise to an income tax, based on the experience of 
American colonies and states in our earlier history would be of 
doubtful value at this time because of changed conditions. We 
shall, therefore, confine our study of the question to the several 
states that have attempted to impose such a tax in recent years. 

Of the forty-six states of the Union, seventeen have made 
provision for an income tax, either in general or special form, 
while several of the other states endeavored to enact such a 
law, but without success. Some thirteen or fourteen tax com- 
missions have treated the subject in their reports with varying 
conclusions. We are, therefore, fortunately not confined to a 
study of the theoretical side of the question only, but can refer 
to the actual experience of several states in their efforts to 
raise a part of the public revenue by means of an income tax. 

The Income Tax in Massachusetts, Virginia, North 
Carolina and Louisiana 

Mr. Delos O. Kinsman, in the Quarterly Journal of Econom- 
ics for February, 1909, thus summarizes the experience of four 
states in recent years with the income tax : 

There have been three periods of income tax activity in the United 
States: the first from 1840 to 1850; the second from i860 to 1870; and 
the third, or present period of activity, which began about 1895. The 
keen interest in the subject during recent years is evidenced by the fact 
that since 1895 sixteen states and three territories have paid attention to 
the tax either by constitutional amendment, legislative enactment, or in 
commission reports. 

The four states employing the tax at the beginning of this period — 
Massachusetts, Virginia, North Carolina, and Louisiana — have been little 



TAXATION 309 

affected by the present movement. The law in Massachusetts, as it has 
stood since 1873, provides that "income from any profession, trade or 
employment shall not be construed to be personal estate for the purpose 
of taxation except such portion as exceeds the sum of $2,000 per annum, 
provided, however, that no income shall be taxed which is derived from 
any property or estate which is the subject of taxation." This act, which 
was the result of compromise, has yielded little revenue to the state. In- 
deed, it has been asserted by the tax commissioner that the "machinery 
of the Massachusetts tax laws is not adapted to the enforcement of an 
income tax, and until it is, the income tax can never attain a prominent 
place in our system." And this statement was made after the appoint- 
ment of a deputy tax commissioner whose duty it is to visit each city 
and town in the state for the purpose of obtaining greater uniformity in 
taxation. 

Virginia, likewise, has apparently been uninfluenced by the present 
activity. While she has the somewhat unique practice of frequently re- 
enacting her revenue laws, she has, for more than a generation, made little 
change in her income tax. For some time all forms of income — rents, 
wages, interests, and profits — have been taxed. Besides certain specified 
deductions a general exemption ranging from $600 to $1,000 has been 
allowed. The present law, enacted in January, 1908, provides for the 
taxation of "the aggregate amount of income in excess of $1,000, whether 
received, or due but not received, within the year next preceding the 
first of February in each year." The law then proceeds to enumerate in 
detail the sources of rent, interest, salaries, and profits upon which the 
rate may be levied. It further declares that in addition to the exemption 
of $1,000 any person may also deduct all losses sustained during the year. 
The administration of the law rests with the local authorities, the income 
being assessed by the local assessor and the tax gathered by the local tax 
collector. 

The revenue derived from the tax has been slowly increasing in amount. 
In 1900 it amounted to $46,023, in 1901 to $58,254, in 1902 to $62,221, in 
1904 to $71,225, and in 1906 to $94,367. While this gradual increase in 
the receipts from the tax is encouraging, and the total amount is con- 
siderable when compared with that received in other states from the same 
source, the amount is still unimportant when compared with the total tax 
of the state. 

The state of North Carolina has had a continuous experience with the 
tax since 1849. Although the law was always simple in form, it reached 
wages, interest, and profits, and, during a portion of the time, rent. In 
1893 the present movement was initiated by the enactment of a new law, 
containing more specific provisions and introducing a progressive rate. 
This progressive rate upon income from sources other than taxable prop- 
erty was doubled in 1895, and, as thus changed, continued in force until 
1 90 1. In the latter year the law abolished the progressive rate and sub- 
stituted a proportional rate of 10 per cent upon all incomes in excess of 
$1,000 except such as were derived from property already taxed. In reply 
to a series of written questions the taxpayer was required to list, in 
itemized form, his gross income from all sources except property taxed. 
The assessor was made subject to a penalty of $5 for each question un- 
answered, the county commissioners being empowered to collect the fine. 
Or any individual might bring suit against the assessor and receive one- 
half the amount collected for his pains. No local unit — city, township, 
or county — was permitted to levy the tax while the state law was in 
operation. 

The law of 1905 materially changed the law of 1901. The taxpayer 
was required simply to declare under oath the amount of his gross income 
in excess of $1,000 from "salaries, fees, trade, profession, and property 
not taxed." It was made unlawful to publish the income tax list or any 
part of it, the penalty for such offense being not more than $50 or thirty 
days' imprisonment. But the assessor might report to the corporation 
commissioner those listed for the income and those he thought should 
be listed, and the corporation commissioner was permitted to take such 
steps as he deemed necessary to secure the assessment and collection of 



310 SELECTED ARTICLES 

such taxes. The law of 1905 was reenacted in 1907 and is in force at 
the present time. 

The state of North Carolina shows an increase of revenue from her 
income tax during the present period. The law of 1895 yielded in the 
following year $3,460, while the total state tax was $604,542. In this 
year, 1896, of the ninety-six counties, thirty-nine returned the tax. Three 
years later, in 1899, the income tax revenue had slowly advanced to 
$4,399, while the state tax had increased to $723,307, and fifty-eight of 
the ninety-six counties now returned incomes. 

The appointment of a state tax commission about 1900 was in harmony 
with the new movement. By issuing a pamphlet of instructions to the 
assessors, explaining the law, and by carefully supervising the assessments, 
this commission added, in round numbers, $41,000,000 to the assessment 
rolls in 1901. It increased the revenue from the income tax from $5,014 
in 1900 to $19,030 in 1901. In that year eighty-one of the ninety-seven 
counties reported the tax. The receipts from it steadily advanced after 
1 90 1, until in 1907 when they amounted to $35,958. The total state tax 
during the same period increased about $100,000. 

The tax commission in its report of 1902 said, in regard to the income 
tax, "there may be some difficulty in working out at first satisfactory de- 
tails for the assessment and collection of the tax, but it can be done." 
Although their report of 1904 contains a number of recommendations for 
the improvement of the revenue laws, no suggestions are found regarding 
the income tax. Indeed, the state auditor says of the present law, "This is 
about the best law, I think, we can have in the state and keep within the 
bounds of constitutional limitations." He further says, "The law of 
course is in its infancy, and will work better as the years go by, and the 
increase will be correspondingly greater, I think, in the years to come." 
The present clerk of the corporation commission says: "The law is prov- 
ing satisfactory as far it goes. A great many are of the opinion that it 
should reach incomes from all sources; however, this is a question in 
which there is a difference of opinion." 

Louisiana is the one state that has discontinued the taxation of in- 
comes during the present period of activity. She first levied a tax upon 
incomes in 1865. Though it continued until about 1900, the law was 
never generally enforced. The receipts of the tax slowly advanced from 
$2,476 in 1868 to nearly $25,000 in 1880, but soon began to decline. In 
1899, when but two of the fifty-nine counties in the state reported incomes 
at all, the total receipts amounted to only $104. The report since 1900 
makes no mention of the tax whatever. 

The Income Tax in South Carolina and Oklahoma 

South Carolina experimented with the income tax from 1701 
to 1868, when it was discontinued. It was revived again in 1897, 
and is still in force. The law provides that there shall be levied 
upon "the gains, gross profits, and income" annually received by 
any citizen of the state from any source, "a tax of 1 per cent 
on the amount so derived over and above $2,500 and up to $5,000 ; 
\Yz per cent on $5,000 and over up to $7,500 ; 2 per cent on $7,500 
and over up to $15,000, and 3 per cent on $15,000 and over." In 
addition to the general exemption of $2,500, the law exempts in- 
terest on United States bonds and state bonds, and also permits 
the deduction of necessary expenses actually incurred in carry- 
ing on the business, occupation or profession. 

It is made unlawful for any officer to disclose or allow to be 



TAXATION 311 

made known in any way the amount or source of income, profit 
or expenditure returned by any person. The amount of the tax 
to be raised is apportioned by the legislature among the counties 
of the state, and is levied and collected in the same manner as 
other taxes. 

So far, the income tax in South Carolina has not given gen- 
eral satisfaction, and several attempts have been made to repeal 
it, but without success. In the first year of its operation, 1898, 
the tax amounted to $6,890, but four years later, in 1902, it 
yielded less than $300. In the following three years the receipts 
from the income tax gradually increased, the amount collected 
in 1903 being $1,476; in 1904, $1,281; and in 1905, $2,130. It 
reached the maximum in 1906, the amount collected in that year 
being $12,201. The receipts for 1907 were $10,687, and for 1908 
$8,554. The total receipts from this source for eleven years, 
1898 to 1908 inclusive, amounted to only $49,929. 

In his report for the fiscal year 1908, the controller-general 
of South Carolina says : 

The law has never been generally enforced. A determined effort was 
made by this office through instructions to county auditors in 1906, — that 
being the re-assessment year for real estate — to exert great diligence in 
enforcing it, but the results have been far from satisfactory. As stated 
in my report for 1907, it is evident that only a small part of conscientious 
people are paying this tax, and others who are liable, and in all prob- 
ability better able to pay, are escaping and evading its payment. Were 
the law strictly and generally enforced in the state, it would, in my 
opinion, secure a revenue of at least $50,000 from this source. Unless 
some means are devised to secure its general enforcement, it had best 
be repealed. 

The new state of Oklahoma provided for an income tax by 
legislative enactment in 1908. The law taxes "gross income 
from salaries, fees, trade, profession, and property upon which 
gross receipt or excise tax has not heen paid, in excess of 
$3,500." The rate is ^ of 1 per cent on amounts in excess of 
$3,500 and less than $5,000; ^4 of 1 per cent between $5,000 and 
$10,000; 1.2 per cent between $10,000 and $20,000; i x / 2 per cent 
between $20,000 and $50,000; 2 per cent between $50,000 and 
$100,000, and 3 T /3 per cent on amounts in excess of $100,000. 

It is made unlawful to print any part of the income tax re- 
turns unless the tax upon the income becomes delinquent. An 
attempt is made to secure a better administration of the law by 
requiring the assessor to send to the state auditor not only the 
names of those who declare that they have incomes in excess of 



312 SELECTED ARTICLES 

$3,500, but also those who, in his opinion, have incomes in ex- 
cess of that amount but have failed to make a return, as well 
as those who, in his opinion, have returned an amount less than 
their actual income. The state auditor is authorized to take such 
steps as he may deem necessary to compel any person whose in- 
come is questioned to make a correct return. The amount of 
the tax due upon the income is certified to the county clerk of 
the county in which the income receiver resides, and collection is 
made by the county treasurer in the same manner as other taxes 
are collected. 

Proportion of Income Taxpayers to Population 

It is interesting to note the proportions of income taxpayers 
to population in these countries having an income tax. In seven- 
teen states in Europe and Australia the average is about 10 per 
cent. In Saxony one out of four, in Prussia one out of six, and 
in England about one out of thirty-seven of the population pays 
an income tax. The difference in percentage of income taxpay- 
ers to population is due largely to the difference in exemptions. 

In Prussia, for instance, where the exemption is $214, nearly 
90 per cent of the income taxpayers were assessed in 1909 on in- 
comes of less than $715, and only about 3 per cent on incomes 
in excess of $1,550. Had the exemption been $1,000, only about 
one in each one hundred fifty of population would have been 
assessed on incomes. In Austria 85 per cent of income taxpayers 
are assessed on incomes of less than $815, while about 3 per cent 
have incomes in excess of $2,500. During the four years of the 
Civil War income tax in this country, 1867-1870, only about one 
out of each one hundred fifty of population paid an income tax. 

Income Taxation More Successful in Europe than 
United States 

A study of the income tax in European countries leads to the 
conclusion that both in operation and revenue it has been much 
more successful than in the United States. This is due, in part 
at least, to the difference in the industrial, commercial and po- 
litical conditions of the people of Europe as compared with the 
United States, and partly to the fact that the principle of taxa- 
tion at the source of the income rather than that of self-assess- 



TAXATION 313 

merit has been followed in those countries of Europe that have 
had the most successful experience with the income tax. 

The Theory of an Income Tax 

The basic theory upon which all proposals for an income tax 
are made is that individuals should contribute to the cost of 
government in proportion to their ability, and that income is the 
most just measure of that ability. That the income tax is an 
admirable one in theory is generally conceded. Indeed, through- 
out its history in the states it has never been seriously attacked 
from a theoretical point of view. Failure has generally been 
attributed to the inapplicability of the principle rather than to 
the principle itself. Nevertheless, sentiment in favor of an in- 
come tax is rapidly growing. It is felt that we have reached a 
point in our industrial development that demands some system 
of taxation that will distribute the burdens of government more 
equitably than the general property tax is now doing. Every 
state has a large class of wealthy citizens who, in proportion to 
their wealth and to the benefits of government received by them, 
contribute but little to the public burden. 

If swollen fortunes could be reached by an income tax, ac- 
cumulated wealth would be made to bear a much larger share 
of the burden of taxation than it is now doing, thus relieving 
the less wealthy and wage-earning classes from a part of the 
unequal share they are now bearing. 

Self -Assessment Not a Success 

But however desirable an income tax may be in theory, an 
investigation of its history in those states that have experi- 
mented with it in practice demonstrates that the system followed 
in this country, that of self-assessment, has not only failed to 
equalize the burdens of taxation, but has been equally unsuccess- 
ful in producing any satisfactory amount of state revenue. 
While some of the advocates of the tax claim that its failure is 
due to the indifference and carelessness of public officials in en- 
forcing the law, others contend that the principle is incapable of 
practical application to the social and industrial conditions of 
the American people. 

Mr. Delos O. Kinsman, who has made a very exhaustive study 
of income taxation in the United States, and from whom we 



314 SELECTED ARTICLES 

have already quoted in an earlier part of this chapter, thus sum- 
marizes his conclusions in his monograph entitled, The Income 
Tax in the Commonwealths of the United States : 

The administration of the law has been much the same in all the 
states. It has been assessed, as a rule, by the local assessors and col- 
lected by the local tax collectors. The laws have required that the tax 
should be levied by self-assessment, almost invariably under severe pen- 
alties for failure to comply . . . The attitude of the state courts 
toward the income tax has been one of sympathy. In the few cases 
upon the subject brought before them they have upheld the tax. Had 
all forces been as active in support of the system as the state courts, the 
tax would undoubtedly have been a success. 



As a result of our study we conclude that the state income tax has 
been a failure, due to the failure of administration, which, in turn, may 
be attributed to four causes — the method of self-assessment, the indifference 
of state officials, the persistent effort of the taxpayers to evade the tax, 
and the nature of the income. The tax cannot be successful so long as 
taxpayers desirous of evading taxation are given the right of self-assess- 
ment. Since all attempts to change the method of self-assessment have 
failed and the nature of industry in the states is at present such as to 
make impossible the assessment of a general income tax at the source, 
we are forced to the conclusion that, even though no constitutional ques- 
tion should arise, failure will continue to accompany the tax until our 
industrial system takes on such form as to make possible the use of some 
method other than self-assessment. 

Investigation of Income Tax by Tax Commissions 

The subject of a state income tax has been treated in the 
reports of several tax commissions in recent years. While most 
of these reports commend the theory of an income tax, nearly 
all of them agree that it is incapable of practical application to 
the existing economic and political conditions of the American 
people. This was the conclusion of the Maine commission in 1890 
and of the Massachusetts special commission of 1897. The 
Massachusetts report says : "In the present situation of this 
country, with our political traditions and business habits, we are 
of the opinion that an income tax would prove exceedingly diffi- 
cult to administer with certainty and with equality of treatment 
as between different taxpayers. . . Here the only possible 
method is that of declaration by the individual taxpayer, with 
all its possibilities of concealment, equivocation, false statement, 
full payment by the honest, evasion by the dishonest, and con- 
stant temptation for evasion and false statement for that large 
class of men neither conspicuously honest nor wilfully dis- 
honest. . . We fear that evasion and concealment would take 



TAXATION 315 

place to so great an extent as to render it ineffective and de- 
servedly unpopular." 

The Wisconsin commission of 1898 says : "Unlike the in- 
heritance tax, it is easily evaded, is a temptation to fraud and 
perjury, and has not generally met with favor in other states." 
The New York commission of 1902 characterized the tax as 
"inquisitorial and against the republican spirit," while the ma- 
jority report of the special commission of 1907 regarded it as 
"inexpedient and inadvisable." The California commission of 
1906 referred to it as inadvisable at the present time, but recom- 
mended that the provision be retained in the state constitution 
for future use if changing conditions justified its adoption. 

On the other hand, the Massachusetts commissions of 1875 
and 1893, while admitting "a lack of uniformity in its construc- 
tion and enforcement, and a wide difference of opinion in its 
worth" recommended that the income tax be retained as a part 
of the taxing system of the state. The minority report of the 
Massachusetts commission of 1897 also recommended its re- 
tention, while the minority report of the Maryland commission 
of 1886 and the Pennsylvania commission of 1889 favored the 
income tax. The Minnesota special commission of 1902 also re- 
garded the tax with favor and held that, if wisely laid "it would 
not necessarily result in more revenue but in a more equitable 
distribution of the public burden." 

Is an Income Tax Inquisitorial and Undemocratic? 

That an income tax, as already stated in this chapter, if cap- 
able of practical application, would be the fairest and most 
equitable tax that could be imposed is now generally admitted. 
But there is a wide difference of opinion as to how far the state 
could and should go in providing machinery for the enforcement 
of such a law. The current objection that an income tax law 
capable of enforcement would be inquisitorial and undemocratic 
may have force and yet it would not necessarily be any more 
inquisitorial than the present federal corporation tax law and 
many other federal laws which impose either direct or indirect 
taxes on privileges and business. 

The tariff laws are certainly as inquisitorial as an income tax 
law would be. Not only are you required to make a disclosure 
of the nature and value of your imports, but on entering an 



316 SELECTED ARTICLES 

American port your very person may be searched if suspected 
of having dutiable goods not included in your declaration to 
the collector of customs. The excise tax on spirituous and malt 
liquors and tobacco involves a searching examination into the 
private affairs of the distiller, the brewer, and the manufacturer 
of tobacco. Even the personal property tax laws of our own 
state require a full disclosure of the kind and value of every 
item of personal property owned by a citizen of the state and, 
if strictly enforced, would be almost as inquisitorial as any in- 
come tax law would have to be. We are, therefore, not inclined 
to the opinion that an income tax is necessarily more inquisi- 
torial than many other forms of direct taxation. 

Not Successful in Other States 

It cannot be denied, however, that the income tax has not 
been a success in those states that have experimented with it. 
While this failure is no doubt due in part to the method of self- 
assessment followed in this country, it is equally true that the 
neglect and indifference of taxing, officials in the enforcement of 
the law has largely contributed to its failure. The attitude of 
the taxpayer has also contributed to the failure of the tax. ' It 
has never been supported by any strong public sentiment. No 
law however meritorious in principle will work successfully in 
practice unless there is a strong public sentiment in favor of its 
enforcement. 

Nature of Income Partly to Blame for Failure 

The objection that the nature of income in this country is 
such as to make evasion of the tax comparatively easy seems 
borne out by the experience of other states with the income tax. 
It is doubtful whether the principle of assessing the income at 
its source could be successfully applied in this state, and as many 
of our citizens derive a considerable part of their income from 
investments in other states, the same difficulties in ascertaining 
the amount of the income would be met with as we now experi- 
ence in our futile attempt to reach foreign stocks and bonds and 
other intangible personal property for purposes of taxation. If 
Professor Cooley's statement that "no means at the command 
of the government has ever enabled it to arrive with anything 
like correctness at the incomes of its citizens" is true then an 



TAXATION 317 

income tax would be a failure, because the whole structure is 
built upon equality of sacrifice and unless every income intended 
to be taxed can be reached no equality could exist. 

Tendency to Evade Taxation 

While it is an unfortunate fact, it is nevertheless true that 
many citizens who should contribute to the support of govern- 
ment exercise their ingenuity in evading the payment of taxes, 
while many others are equally zealous in concealing as much of 
their property as possible. This tendency to evasion naturally 
affects the taxing officials, for they are but a reflex of public 
sentiment, hence their neglect and indifference in the enforce- 
ment of our tax laws. The stream cannot rise higher than its 
source. Until the public conscience of the average taxpayer 
can be improved, we fear it is idle to hope for a successful and 
equitable taxation of incomes. In principle an income tax is 
the most just and equitable that could be imposed, for it takes 
from the individual amounts more equitably proportioned to his 
ability to pay than any other form of taxation yet devised. But 
in practical application it has not been a success in other states 
of the Union that have experimented with it, and it is scarcely 
reasonable to suppose it would be any more successful in Min- 
nesota. 

Conclusions 

As a result of our investigation we are of the opinion that, 
under present conditions, and until some other method than that 
of self-assessment can be devised, and until the development 
of a stronger public sentiment favorable to the strict enforce- 
ment of all tax laws, an income tax in Minnesota would not 
prove any more equitable or satisfactory than the present per- 
sonal property tax. 

We are not without hope, however, that some equitable 
method of taxing incomes will yet be devised. Other commis- 
sions, as well as many students of taxation, are engaged in the 
study of the question and are earnestly endeavoring to solve 
the problem of the equitable and successful taxation of incomes. 
It will be the policy of this commission to continue its investiga- 
tion of the subject in the hope that in a future report it may 
be able to offer more definite suggestions for your consideration 



318 SELECTED ARTICLES 



STATE INCOME TAXES x 

The income tax is indeed an admirable tax in abstract theory, 
but we feel convinced that it will not work in practice in New 
York. The general property tax is also defensible in theory, 
but it has been found not to work in practice under American 
conditions. In the body of the report, the personal property 
tax is termed ineffectual, and therefore inequitable. The same 
would, in our opinion, be true of the income tax. It would not 
work well in practice, and whatever fails to work in practice is 
indefensible as a legislative proposition. In fact, it is easier to 
levy a personal property tax than it is to levy an income tax; 
for some personal property at all events is tangible and visible, 
while no part of income is ever tangible or visible. The income 
tax has been tried in many of the American states, and now 
exists in several commonwealths. It has always been a dismal 
failure. What reason is there for supposing that what has 
always been a failure will, at once, become a success? The 
reason of the failure is to be found in the economic and political 
conditions of American life. Those conditions cannot be changed 
by law. They are the same conditions which have made the per- 
sonal property tax a failure. 

The second objection is that which is due to interstate com- 
plications. The income tax theory assumes that all the people 
subject to the tax secure their income in the state, and that all 
people receiving an income in the state live in the state. Both 
assumptions are illegitimate. A man may live in New York and 
get his income from all over the country; or a man may get his 
income from New York sources and live elsewhere. Any 
attempt to legislate for the whole country by a New York law 
must inevitably fail. 

Suppose, for instance, that a resident of another state hap- 
pens to spend several months in New York on a pleasure trip. 
According to the scheme suggested, he would be subject to a 
tax on his entire income, irrespective of the question whether 
he was already being taxed on his income or on his personal 
property in the state of his re idence. This would create an 

1 Report of the Special Tax Commission of the State of New York. 
1907. p. 46. 



TAXATION 319 

intolerable situation. Moreover, a man might carry on his busi- 
ness through agents in New York City, and might live in New 
Jersey or Rhode Island and thus completely escape taxation. 
Instances of these interstate complications might be multiplied 
indefinitely and would show how impossible it would be to reach 
any uniformity of burden by making the income tax a state or 
local tax. Economic and business life in the United States has 
become a national life ; it has transcended state boundaries. Any 
attempt by a single state to run against this current is doomed 
to failure. 

The third objection is that of practical inequality. So far 
as the tax would work at all, it would, in the opinion of your 
Commissioners, work spasmodically and would produce injustice. 
The rich man would stand from under, as he does at present 
with the personal property tax, especially in those states which 
have a listing system. Either he would live without the state 
and conduct his business here through agents, or he would so 
arrange his affairs as to secure most of his income from extra- 
state sources which could not be reached and which could be 
so manipulated as not to show in his books. While the aim 
of the law would be to press less hardly upon the moderate 
and fairly well-to-do class, the practical result would be, in 
our opinion, to impose the burden upon these very sections of 
the community, and to exempt the wealthier classes who can 
afford to employ the most astute legal talent to aid them in 
evading the law. The tax would seek to secure equality ; it would 
result in crass inequality. 

The fourth objection is that an income tax of the kind 
recommended would lead to corruption. As is well known, 
there are two methods of levying an income tax. The one 
is to assess the recipients of the income directly upon their 
entire income. This is sometimes called the lump-sum income 
tax. The other method is to assess the tax, not upon the 
person who receives the income, but upon the person who pays 
the income, thus deducting the tax from the amounts payable 
to the income receiver. This is sometimes called the stoppage- 
at-source income tax. . . The income tax bill discussed by our 
colleagues proposes to reintroduce the discredited methods which 
have never worked well in Anglo-Saxon countries and which 
have been abandoned as far as possible in England. No one 
who is at all acquainted with the administrative conditions in 



320 SELECTED ARTICLES 

the United States or with the difference as between Germany 
and America in the attitude of the average citizen to the admin- 
istration can entertain much doubt that German methods are 
inapplicable in this country. We feel that the only result of 
levying such a direct income tax, resting on the listing of all 
incomes by the taxpayers, would be precisely as in the case of a 
rigorous personal property tax, to increase, not equality, but 
perjury and corruption. The law would either remain a dead 
letter, as is the case in most of the American states where the 
income tax is now imposed, or it would tend to create illicit 
bargains between the taxpayers and the assessors, as is now the 
case in almost every state of this country where the listing sys- 
tem has been introduced and where great power is given to the 
assessors in connection with the tax on personal property. 

The rich experience of the United States shows conclusively 
that an income tax of the kind recommended by our colleagues 
would be ineffective. Even the national income tax, during the 
Civil War, was a notorious offender in this respect. . . The 
state income taxes which are found at the present time are mere 
farces, and there is, in our opinion, no reason to expect much 
better results in New York. Human nature is about the same 
in New York as it is everywhere else. 

While there is, in our opinion, no doubt as to the inadvis- 
ability of an income tax of the kind recommended by our 
colleagues, the question arises whether a different method of 
levying and administering the income tax might not remove 
most of the above objections. As an abstract proposition, 
again, we do indeed believe that a stoppage-at-source income 
tax as employed at the present time in England" is far pref- 
erable to the lump-sum income tax discussed by our colleagues. 
Even the adoption of the English system, however, would not, 
in our opinion, completely remove the objections to an income 
tax. 

Our chief doubt arises from the fact that the English system 
is not applicable to American conditions within the separate 
states. In England almost everyone who receives dividends 
or interest on his securities, domestic or foreign, receives them 
through a banker, who is compelled to make returns to the 
income-tax board. In America a man keeps his securities in 
safe deposit vaults, cuts off his coupons and deposits them 
for collection in a bank, which is, as often as not, situated in 



TAXATION 321 

another state. Bonds, moreover, are not usually registered in 
the name of the owner, so that it would be almost impossible 
for a bank or an agency to know whether the person who has 
so deposited the coupons is the owner or the assignee. Moreover, 
to the extent that a man's income is derived from foreign 
corporations — and the great mass of New York incomes is 
derived in that way — it would be impracticable to reach the 
foreign agencies or organizations, for a state income tax could 
not apply to extra-state corporations. In short, looked at from 
any point of view, the whole system of stoppage at source, as 
applied to its most important point, namely, the income from 
intangible securities, would break down almost completely, except 
in so far as New York corporations are concerned. It is easy 
to see that the probable result of such a law would be to 
transfer investments to foreign corporations. . . 

In short, we incline to the opinion that even if the income 
tax is advisable at all, it is advisable at present only as a 
federal tax. As long as New York is surrounded by common- 
wealths which seek to attract to themselves much of the wealth 
of their rival, it is unreasonable to expect a development of 
interstate comity in taxation which would redound to their dis- 
advantage. Such an interstate comity can probably be forced 
upon the American commonwealths only from above ; and it is 
a debatable question whether the national government has the 
constitutional power to do this. At all events, for New York 
State to act independently in this matter would be, in our 
opinion, highly inexpedient. 

We, therefore, conclude that any form of state income tax 
is at present inadvisable. Some of the undersigned were years 
ago in favor of such a scheme, but a closer acquaintance with 
the administrative and economic conditions of American life 
has forced them to the conclusion that a state income tax would 
be a failure. The project is beautiful in fiscal theory, but use- 
less in actual practice. . . 

Whatever may be the situation in future 5'ears, your Com- 
missioners are convinced that to advance the project of a 
direct state income tax at the present time is an iridescent 
dream. The scheme might succeed in bringing in some revenue, 
but it would, in our opinion, be sure to bring in its train in- 
equality, fraud and corruption. Far from being a remedy for 
our present evils it would only accentuate those evils. 



322 SELECTED ARTICLES 

It is for these reasons that we consider the imposition at 
the present time of a direct state income tax inexpedient and 
inadvisable. 



MINORITY REPORT, NEW YORK COMMITTEE 1 

The undersigned members of the Committee appointed under 
a joint resolution of the Assembly and Senate of the State of 
New York to examine the laws of this state and of other states 
relative to taxation, and to investigate into the systems and 
methods of taxation, particularly with regard to the best meth- 
ods of equitably and effectually reaching all of the property 
which should be subject to taxation, herewith submit the fol- 
lowing report in which we differ from the conclusions and 
recommendations arrived at by our colleagues : 



Defects in our System of Taxation 

The great fault with our entire system of taxation lies in a 
lack of centralized administration, and that is due to the origin 
and growth of our tax system which started from below up, and 
not from the top down. In other words, our system of taxation 
both on land and personalty was entirely a local system originat- 
ing in colonial times, making each town, ward and city an inde- 
pendent tax unit. It is not to be wondered at therefore that 
there should have been serious difficulties and discrepancies in 
the various methods of local taxation under which we find real 
estate assessed in different parts of the state at from 40 per 
cent to ioo per cent of its value, and personal property either 
assessed not at all or to a nominal extent. Added to this, and 
perhaps because of it, we have constitutional provisions which 
make it difficult to enforce a uniform system of taxation, and 
even more difficult to impose any new system of state taxation 
having real or personal property as a base. 

State System of Indirect Taxes 

It is only since the year 1880 that the State of New York has 
adopted a centralized system of taxation based largely on corpo- 

1 Minority Report of the Joint Legislative Committee on Taxation. 
New York. 19 16. 



TAXATION 323 

rate franchises, excises and privileges derived from the state, 
so that notwithstanding the difficulties under which we are labor- 
ing, and despite a constitution which to a very large extent 
fastens this local and decentralized system upon us, with im- 
proved laws having a proper and legal base of taxation, enforce- 
able under central authority, we will eventually arrive at a more 
uniform and logical system of taxation. 

Proposed State Income Tax 

Now as to the remedy which our associates on the Committee 
have suggested for the evils of the general property tax system 
in the form of an income tax, we are by no means in accord. 
Income means ability to pay, but so does capital, and the latter 
requires the services and protection of the state more than the 
former. We know of no great state in the Union which has en- 
tirely supplanted its local system of taxing personal property, 
and its state system of taxing miscellaneous corporations, with 
a state income tax. The ability to pay theory is not the only 
theory on which property pays a tax; concessions and privileges 
from the state, irrespective of income, and property which may 
be accumulating but yields no income, all of which obtains the 
protection and services of the state government, have always 
been a favorite basis on which taxes have been assessed and 
paid. 

Wisconsin State Income Tax. Experience of Massachusetts 

Wisconsin is the only state of any importance that has 
today an income tax enforced with any degree of efficiency, and 
that supplements rather than takes the place of its personal prop- 
erty tax system. Wisconsin, however, has no classified property 
tax which we have in New York, from which nearly $50,000,000 
of indirect taxes are obtained from personal property. To 
understand just how much we get from this source we need only 
make the following tabulation for the fiscal year ending October 
1, 1014: 

Excises $9,360,000 

Corporations 1 1,634,000 

Organization of corporations 345,000 

Transfer Tax 1 1 , 1 62,500 

Stock Transfer Tax 2,056,680 

Secured Debt Tax 828,619 

Mortgages 1,390,746 

Motor vehicles 1,528,220 



324 SELECTED ARTICLES 

If we add to this aggregate the excise and mortgage taxes 
paid to the localities we find that nearly $50,000,000 is derived 
from the indirect taxation of personal property in the state. 

If we correctly understand the recommendations of our col- 
leagues for a state income tax they propose to tax the income 
from the sources covered by the above taxes, without relieving 
the owners of the property from the indirect taxes. It seems to 
us that to tax the income in addition to the property from which 
it comes is in the nature of double taxation. 

It is true that the state of Massachusetts has, through a com- 
mittee, recommended a modified income tax on securities and 
interest-bearing certificates, as well as on salaries and profes- 
sional incomes over $2,000, but the recommendations of the 
Committee have not been as yet put into the form of law, and 
the proposed law does not interfere with the taxation of corpo- 
rations. In both of these states, however, it is to be borne in 
mind that constitutional amendments have been proposed and 
carried under which income tax laws could be passed. The 
courts have generally held that a tax on income is a tax on 
property. (Pollock v. Farmers' L. & T. Co., 157 U.S. 429; In re 
Opinion of Massachusetts Justices, 195 Mass. 607.) If so, we 
are confronted with the objection that under our Home Rule 
provision of the State Constitution, article 10, section 2, no 
income tax can be administered except through the local asses- 
sors. In the case of People ex rel. Metropolitan Street Rail- 
way Co. v. The Tax Commissioners, 174 N.Y. 417; as well as 
in the later case of People ex rel. Pelham v. Pelham, 215 N.Y. 
374, it was clearly held that the functions of the local assessors 
could not be assumed by, or delegated to, any other officer or 
body; and it is manifest that if the income tax is not administered 
by the State Tax Commission or a central board it will be as 
great a farce as the present personal tax system. 

Let us assume, however, that the State Income Tax is consti- 
tutional and legal and that such a law could be carried into 
effect, how would it work? Would it bear on the entire com- 
munity generally, or would those that were most able to pay 
escape the burden of the tax? 

The following table is taken from the 1914 annual report of 
the Tax Commission of Wisconsin where under an efficient and 
centralized administration we find how the tax is distributed and 
upon whom the burden rests. 



TAXATION 



325 



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326 SELECTED ARTICLES 

Difficulty of Taxing Non-Residents in New York 

Whatever may be the result of the working of the system in 
Wisconsin, where two-thirds of the total number subject to the 
income tax pay on incomes of less than $1,000, and the entire 
income tax, exclusive of the offset derived from the personal 
property tax, amounts to a little over $2,000,000, we have in the 
State of New York peculiar conditions which will make it easy 
for the non-resident or foreign corporation to seek another 
habitat, or by constitutional or legal reasons to escape the tax 
entirely. In this state there is a larger aggregation of non- 
resident wealth and capital than in any other state of the 
Union. Financially New York city is the capital of the United 
States, and if our tax system is not made too onerous it may 
soon be the financial capital of the world. A very large por- 
tion of the income earned in this state belongs to non-residents 
and foreign corporations doing business here. In other words, 
it has its situs or home at the residence of the non-resident, and 
not within the state. The State of Massachusetts does not 
seek to subject the income of its non-residents to a tax in its 
proposed law, which applies only to "inhabitants," nor are we 
able to ascertain that any effort is made to collect any appre- 
ciable part of the tax from the capital of non-residents in the 
State of Wisconsin. In the face of the decision of the Court 
of Appeals in The City of New York v. McLean, 170 N.Y. 374, 
we do not know how it will be possible to collect a tax from 
non-residents under sections 359 and 360 of the proposed In- 
come Tax Law; nor do we believe it can be done under any 
State Income Tax Law. If those intended to be subject to the 
tax under the proposed law are not lucky enough to have a 
residence out of the state they may turn their property over 
to foreign corporations who will escape the tax, and in this 
way New York will devise a tax law for the benefit of the 
treasuries of her sister states by driving capital out of her own 
state. 

Difficulty of Collecting Income Tax in Wisconsin 
Even in the State of Wisconsin, where the public have not 
yet become educated in methods of tax-dodging, the collection 
of the income tax has already in the third year of its admin- 
istration became a serious question, for says the 1914 Report: 



TAXATION 327 

. . . After the delinquent roll comes to the county treasurer, the 
sheriffs, as a rule, make no earnest or persistent effort to collect. There 
are marked exceptions, of course. The local treasurers of some munici- 
palities and the sheriffs of some counties do make real and consistent 
efforts to collect the delinquent taxes. But for the most part the law is 
a dead letter. 

There are reasons, of course, for the existing conditions. Forcible 
collection of taxes is a disagreeable and unpopular work. The man who 
respected and obeyed the mandate of the legislature and fully enforced 
the law would be very likely to lose his office. In some cases the execu- 
tion of the law would work real hardship. And local treasurers — although 
paid larger salaries than assessors for a much less onerous and difficult 
service — are nevertheless probably not paid enough to warrant widespread 
activity in the collection of the more difficult tax bills. The same is true 
as to county treasurers and sheriffs when the tax roll reaches them. It 
is also possible that the law itself is too harsh and should be changed. . . 

At present the delinquent tax goes very largely by default and those 
who are honest pay, while the crafty and recalcitrant escape. That so 
large a proportion of those subject to personal property and income taxes 
pay promptly and voluntarily is a tribute to the civic spirit of the average 
Wisconsin taxpayer. 

Can our colleagues believe that fifty years of experience with 
our personal tax system will make delinquents under their own 
proposed income tax law less agile in evading the tax-gatherer, 
or do they rely on the "civic spirit of the average Xew York 
taxpayer" to collect delinquent income taxes? 

English and United States Income Tax Lazes 

It is interesting to know from recent reports that in England, 
which is the original home of the income tax, and w T here it 
has flourished for nearly one hundred years, the system in actual 
practice has been described by a commissioner of internal revenue 
at an inquiry held some years ago as an '"antiquated and hap- 
hazard system putting a premium on fraud and enabling the 
dishonest taxpayer to evade his burden at the expense of the 
honest taxpayer." If this has occurred in England, what may 
be expected under the difficulties surrounding our dual system 
of state and Federal government? 

In the United States last year 357,515 persons paid the 
federal income tax, of whom more than one-fifth were in the 
state of Xew York. In other words, about one person out of 
every two hundred paid an income tax, and we venture to 
predict that if the exemptions are not lowered and the law re- 
mains practically the same, in five years not more than one 
in every three hundred will pay the tax. As the administrative 
machinery of the federal government becomes stricter and more 
inquisitorial the inventive resources of the tax-dodger will be- 
come more highly developed in his ability to evade the tax. 



328 SELECTED ARTICLES 

The proposal to levy state taxes on the income of the inhab- 
itants of the State of New York is in conflict with the system 
of taxation in force for over a hundred years in the United 
States of America. The course of events in this country dis- 
closes a tacit understanding, almost inviolate between the Fed- 
eral government and the governments of the states of the 
Union, that the states will not levy taxes upon the same sub- 
ject-matters first appropriated by the United States. 

From the foundation of the Federal government it has levied 
its taxes, by the consent of the people of the states, either at 
seaports, known as ports of entry, or else by the excise taxes, 
known as internal revenue taxes; leaving to the states of the 
Union taxes levied on the property within their several jurisdic- 
tions. By a recent amendment to the Federal Constitution the 
United States is now permitted to tax, and does tax, the incomes 
of its citizens wherever resident. If the State of New York 
shall hereafter proceed to tax the incomes of those citizens of 
New York already paying income taxes to their general govern- 
ment, it will be a violation of the tacit distribution of the taxing 
powers so long acquiesced in throughout the United States. 

In practical operation double taxes upon the same subject- 
matter, levied by two governments, state and Federal, will create 
great dissatisfaction among the people of this state. Our people 
will think, and think rightly to some extent, that they are being 
subjected to too much government in times of peace. This is 
always, in all ages, one objection to any federal plan of govern- 
ment. We should not willingly add force to this objection. In 
times of war our people are patriotic enough to yield, in any 
manner government sees fit to adopt, all the revenue which 
either the state or the Federal government needs for the pub- 
lic security or protection. But in times of peace the people of 
this state will not, we venture to affirm, tamely submit, for a 
long space of time, to two sets of governmental tax-gatherers 
demanding taxes from the same sources of revenue. There is 
no reason at this time, in our judgment, why they should so sub- 
mit. There are other adequate sources of revenue, besides taxes 
on the income of our citizens, which are open to the state, and 
these should be first exhausted before a resort is had to the in- 
comes now subjected to taxation by the Federal authorities. 



TAXATION 329 

Remedies Offered as a Substitute for the Income Tax 

Our associates on the Committee propose with one stroke of 
the pen to take away from the local assessor at least $500,000,000 
of taxable property by wiping out the Personal Tax Law. Not 
content with this they also propose to cripple the State Franchise 
Tax Law by taking away at least $2,000,000 of the annual tax 
now imposed on miscellaneous corporations, and there is ser- 
ious doubt whether this amendment* would not endanger at least 
$10,000,000 of yearly franchise taxes under the correlated sec- 
tions of the law. The Francise Tax Law of this state has been 
in operation for nearly thirty years and has been passed on in 
all its phases by the highest courts of this state, and in its most 
important features by the Supreme Court of the United States. 
It provides a revenue of nearly $12,000,000, and with some 
amendments it could be made to produce a revenue of 
$25,000,000. So eminent an authority as President Purdy, of 
the Board of Taxes and Assessments of the City of New York, 
has said that the Franchise Tax Law, which is capable of a 
central and uniform administration, could be modeled into a 
very good statute having all the advantages claimed for the pro- 
posed Income Tax Law recommended by our associates, and 
none of its disadvantages. It would be legal and constitutional, 
and it could not be evaded by non-resident corporations, and it 
would bring sufficient revenue to supply in part the needs of the 
government, and if section 12 of the Tax Law assessing corpor- 
ations on their capital stock for local purposes were repealed, 
part of the tax could be distributed to the state and part to the 
localities. 

Amendment of Franchise Tax Lazv 

Partly in line with these suggestions, and partly in conform- 
ity with suggestions from the State Tax Commission and the 
State Comptroller's office, the undersigned have agreed upon 
certain changes to the present State Corporation Tax Law, 
amending sections 180, 181, 182, 183 and correlated sections of 
the Franchise Tax Law. The effect of these amendments, to- 
gether with the changes in the Inheritance Tax Law, discussed 
later, with a reasonable return to the localities, in each case, 
will, in our opinion, result in more "effectually reaching all of 
the property which should be subject to taxation." Tf the rates 
under the franchise tax are increased and section T2 abolished 



330 SELECTED ARTICLES 

the same amount of revenue might be returned to the localities 
and the evils under section 12 entirely done away with. It will 
then no longer be possible for a corporation to do business in 
the City of New York and file its certificate in Esopus or 
Painted Post, and thus escape taxation. 

The following are the principal changes recommended : 
Section 180 of the Franchise Tax Law is amended so that no 
organization tax shall be less than $10, and section 181, relating 
to the license tax on foreign corporations, is likewise amended so 
that the same minimum tax be paid by a foreign corporation. 
The changes in section 182 make it more intelligible and in 
harmony with the original intent of the framers. Under the 
present law there are about fifty thousand corporations who file 
reports under section 182 of the Tax Law, and about 15 per 
cent of the entire number pay no tax at all, because either 
their bonded indebtedness or their general liabilities exceed their 
assets. About 40 per cent of the remainder pay an average tax 
of less than $2. Under the proposed law no annual franchise 
tax shall be less than $10, or less than three-quarters of a mill 
on the par value of the capital stock. If the actual value of the 
assets exceeds the par value of the capital stock, or if the 
market price of the stock exceeds the par value of the capital 
stock, the tax shall be based on whichever of these valuations 
shall be highest. If a corporation pays a dividend of more than 
3 per cent the tax shall be at the rate of one-quarter of a mill 
for each per centum of dividend. The basis of valuation has 
also been changed so as to include the bonds as well as the 
stock, instead of on the capital stock alone. Two corporations, 
one with a $1,000,000 of capital stock without any bond issue, 
should not be treated any differently than a corporation that 
commences business with $500,000 of capital stock and $500,000 
in bonds. From the economic standpoint the capital of both 
corporations is the same and should be treated alike. In this 
connection we desire to call attention to an extract from the 
last report of the State Comptroller: 

Your attention is respectfully called to transactions in connection with 
the reduction of capital stock which seem to be arising somewhat fre- 
quently of late, where corporations are seeking to reduce capital, and, as 
a part of the same adiustment. issue bonds, notes or other obligations in 
exchange for the retired capital. When corporations proposing to reduce 
their capital stock have met the requirements of the Stock Corporation 
Law. the Comptroller, under section 64 of that law. is directed to approve 
of the reduction, "Tnle^ corrective legislation is enacted, this office is 



TAXATION 33J 

placed in the apparent position of giving its approval to the subtle strat- 
agems of tax-dodgers. 

From the standpoint of public policy of the state, particularly as 
regards its taxing power, in view of the fact that such action seems 
to be an effort to transpose the payment of dividends upon stock into the 
payment of interest upon notes, bonds or other obligations, and thus 
greatly reduce and perhaps almost entirely evade the tax on franchise 
imposed under section 182 of the Tax Law, it would seem fitting that 
an equivalent tax should be levied upon all interest-bearing obligations 
negotiated in lieu of assessable capital stock. 

Manifestly this condition should be remedied and your thoughtful 
attention is respectfully requested to the end that the state's sources of 
revenue may not be further endangered. 

Exemption of Manufacturing Companies to be Repealed 

Section 183 is amended so as to permit the taxation of manu- 
facturing, mining and laundering companies, agricultural and 
horticulturist associations. There is no reason why these com- 
panies should be exempt from state taxation, thus giving them 
an undue advantage over non-manufacturing corporations, and 
we believe that the small annual tax required of these corpora- 
tions will not induce them to move out of the state. The 
remaining changes that we recommend in the Franchise Tax 
Law are administrative, and comprehend a more convenient 
assessment and effective collection of the tax. 

We estimate that the proposed changes in the Franchise Tax 
Law will bring into the treasury of the state additional revenue 
of about $12,000,000 per year. This is based on a minimum 
rate of three-quarters of a mill on the par value of the capital 
stock, irrespective of the higher rates that would be paid by 
corporations earning a greater dividend than 3 per cent. The 
figures which we have used in making this estimate are taken 
from the annual report of the United States Commissioner of 
Internal Revenue for the year ending June 30, 1914, from which 
we conclude that the amount of capital stock of New York 
corporations subject to a franchise tax on said stock would be 
about $14,000,000,000. At present we receive about $3,500,000 
from corporations subject to a franchise tax on capital stock, 
the remainder being derived from a franchise tax on gross 
earnings, insurance premiums, and on trust companies, savings 
banks, etc. We also estimate from the figures presented in the 
same report that the bonded indebtedness of these corporations 
would be about $7,000,000,000, which would produce, together 
with the franchise tax on capital stock, an additional tax in the 
aggregate of over $12,000,000. If in addition to all this, section 



332 



SELECTED ARTICLES 



12 of the Tax Law were repealed, the corporations thereby 
being relieved from local taxation on personal property, and 
an additional three-quarters of a mill be added to the tax to 
supply this deficiency, there would be returned to the localities 
more than enough to repair the loss. 

Apportionment of Taxes 

We have already intimated that there is not a sufficient cor- 
relation in the system of indirect taxation between the state 
and localities. True,, the mortgage tax and excise tax are appor- 
tioned between the state and localities, but this same principle 
should be extended to the stock transfer tax, the motor vehicle 
tax and the inheritance tax, and if section 12 of the Tax Law 
is abolished and the franchise tax extended, there should be 
an apportionment of the state corporation tax as well. In this 
way only can the state compensate the localities for the taxes 
taken away from local assessors and brought under state juris- 
diction. 

Proposed Amendment to Transfer Tax Law 

Three years of practical experience under the amended Trans- 
fer Tax Law (Inheritance Tax Law) has shown that the ex- 
pected increase in taxation by the progressive rates provided in 
that statute have not produced the anticipated results. The 
Comptroller in his 1915 annual report makes the following state- 
ments : 

. . . The present law has been in force since July 21, 191 1, and 
sufficient time has elapsed to show that the normal annual income there- 
from is between $7,000,000 and $9,000,000, which the Comptroller is in- 
formed is less than one-half of the income the present statute was ex- 
pected to produce. For the purpose of comparison the following table 
shows the number of estates paying a +ax within certain stated amounts 
during the past three years, from which it will be seen that there is only 
a slight variation in the number of estates paying a tax each year within 
the limitations set forth at the head of each column: 



Estates 

Paying 

Tax 


$10,000 

to 
$20,000 


$20,000 

to 
$50,000 


$50,000 

to 
$100,000 


$100,000 

to 
$500,000 


Over 

$500,000 


Total 

Estates 


Aggregate 
tax paid by 
these estates 


1913 

1914 

1915 


61 

69 
60 


50 
45 
46 


15 
13 
18 


4 
15 
14 


' 2 

1 



132 
143 
138 


$10,546,461.66 
9,282,193.97 
5,859.097.51 



TAXATION 333 

It is true that the sum of $12,724,236.86 was received in 1913 and 
$11,162,472.40 in 1914 from this source of revenue, but two estates paid 
taxes aggregating $5,561,202.56 in 1913, and one estate paid a tax of 
$2,584,000.00 in 1914, while this year but one estate paid a tax as high 
as $395,094.06. 

The small percentage of estates subject to the graded rates of tax, 
as shown by the appraisals for the past two years, justifies me in calling 
to your attention the necessity of reducing both the exemptions allowed 
on individual transfers, as well as the several limitations beyond which 
the next higher rate of tax becomes effective, if the state is to receive 
annually from this source of revenue the amount of tax that the present 
statute was expected to produce. 



Owing to the present large exemptions almost every estate between 
$10,000 and $30,000 where the property passes to those in the 1 per cent 
class is wholly exempt. This amendment eliminates from 25 to 40 per 
cent of the estates in most of the counties of the state which under the 
old law would have been taxable. 

We recommend, therefore, that the inheritance or transfer 
tax as it is called be amended in accordance with the last report 
of the State Comptroller so that the exemptions of $5,000 under 
section 221 of the Tax Law apply only to father, mother, wife, 
widow or minor child, and the progressive rates be regarded in 
accordance with the suggestions made in that report, viz., so that 
the 

1 per cent be limited to individual transfers of $25,000, 

2 per cent to the next $75,000, 

3 per cent to the next $100,000, 

4 per cent over $200,000, 

and also that the rates to collateral relatives and strangers be re- 
graded in accordance with said report; and, further, that a tax 
be imposed on estates of non-residents, such as existed prior to 
191 1. It is believed that these amendments, which have been 
suggested by the experience of the Transfer Tax Bureau in the 
last three years, would bring in additional revenue of about 
$5,000,000 annually. 

Non-Resident Estates 

It will be noted that our recommendations as to the tax on 
non-resident estates is limited to property having an actual situs 
within the state, and to sums invested or capital employed 
within the state. The courts of this state have clearly defined, 
both in relation to local taxation as well as to the state fran- 
chise tax, what is meant by these terms, and the suggested amend- 
ments are therefore not at all theoretical, but can be safely 



334 SELECTED ARTICLES 

followed in practice. In this respect we are steering a middle 
course between the recommendations of the State Comptroller, 
who would tax all property of non-residents within the state 
whether here temporarily or not, and the recommendations of 
our colleagues in the majority report, that would leave the law 
as to non-residents in its present shape. We believe that much 
injustice has been done in the past by taxing all the property 
of non-residents irrespective of whether it was employed in the 
state or not, and irrespective of whether it had a situs here. In 
many instances bank accounts belonging to the estates of non- 
residents were taxed under the old law although such accounts 
were only here a few days at the time of the death of the testator 
or intestate. The result was that many large deposits were with- 
drawn from the banks of this state and re-deposited in the insti- 
tutions of neighboring states. 

Exemptions from Taxation to be Limited 

Exemptions from taxation are rapidly becoming a huge and 
increasing item and the subject deserves the serious attention of 
the Legislature. In 1907 the total exemptions in the City of New 
York aggregated over $1,156,000,000, and the total assessed valu- 
ation was a little over $6,000,000,000. In 1914 the total exemp- 
tions were nearly $1,874,000,000, and the total assessed valuation 
was a little over $8,400,000,000, or a little more than 22 per cent. 
Of the $1,874,000,000 of exempt property in 1914 over 
$1,423,000,000 consisted of city property, and about one-half of 
this amount consisted of public parks and play grounds. The 
federal property consisted of a little over $66,000,000, which 
showed a decrease from previous exemptions. The property of 
the state amounted to $3,298,000 and also showed a decrease. 
Of the total amount of exempt property in the City of New York 
$371,000,000 belongs to religious institutions, asylums, hospitals, 
private colleges, schools, cemeteries and other private corpora- 
tions. There is no power in the state government to tax the 
property of the Federal government, and to tax state or city prop- 
erty would simply mean taking it out of one pocket and putting 
it into another ; therefore our efforts in limiting exemptions 
must be directed to private exemptions under the general laws. 
The present easy method of exempting all sorts of institutions, 
associations and organizations, irrespective of whether the build- 
ings belonging to them are used for charitable, religious or 



TAXATION 335 

educational purposes has been subjected to great abuse, and we 
think the only effectual way to deal with it is by constitutional 
amendment, such as that proposed by the recent constitutional 
convention, requiring a two-thirds vote of all the members 
elected to both houses before private property could be with- 
drawn from general taxation. We believe that if this amend- 
ment were submitted to the people in a separate measure there 
would be no difficulty in securing the passage thereof. A mere 
statutory amendment would not bind any future Legislature and 
would not have any permanent effect. 

Habitation or Occupation Tax 

We have said nothing about the habitation tax or occupation 
tax, which would probably work well in its administrative fea- 
tures applied to metropolitan centers. The weak feature of this 
tax, we think, would arise from the fact that it would be an 
additional burden on real estate, and would perhaps, if it were 
at all onerous, drive tenants from the cities of the state to the 
suburbs where they would not be subject to such tax. 

We do think it would be infinitely preferable to the personal 
property tax on individuals, and that it would probably work 
well for cities of the first and second class, provided that the 
application of the habitation tax were limited on the one end to 
the well-to-do at a low rate, and graded upward at a very mod- 
erate progressive rate so as not to drive any one out of the state. 
We believe, however, that this change in tax legislation should 
await the more important state-wide remedies that we have other- 
wise suggested. 

We oppose that part of the habitation or occupation tax 
scheme known as the salaries tax, on the ground that it is wrong 
economically and doubtful in its legality. The intent of this part 
of the plan of taxation was to reach the non-resident salaried 
class who have no habitation or place of business in the state, 
but who derive large salaries from employment in the state. 
Economically this is based on the very narrow view that the 
employee as well as the employer should pay a tax. although 
the employer, it will be assumed, has already paid the occupation 
tax, and the salaried non-resident indirectly contributes more to 
the state in what he spends than any impost that might be ex- 
acted from him. While we have not had time to examine the 
legal question of taxing salaries of non-residents employed here, 



336 SELECTED ARTICLES 

we believe that there is grave doubt whether such a tax limiting 
the rights of a non-resident to sell his services within the state 
would not be contrary to the Constitution of the United States. 

Special Franchise Tax 

We regret that the time of the committee did not permit a 
study of the special franchise tax which, in our opinion, is a 
fruitful field for much needed improvement. Increasing taxes 
upon public service corporations must ultimately be reflected in 
the rates for service to the public. Under the court decisions in 
special franchise tax cases the intricacy of correct assessment 
is a serious matter for tax administrators. The basis of net 
earnings, approved by the court, leaves an open door for dif- 
ferences between the corporations and the State Tax Commis- 
sion resulting in much litigation. A thorough study of this sub- 
ject might be productive of more scientific methods of assess- 
ment Taxes upon gross earnings at rates varying according to 
the nature of the public service operation on the one hand, and 
further classified upon the relation of the gross receipts from all 
sources to legitimate operating expenses determined by the Pub- 
lic Service Commissions are worthy of thorough investigation 
and study. 



TAXATION IN OKLAHOMA 1 

During the current year the state of Oklahoma, including its 
various subdivisions, will expend for maintenance of govern- 
ment, including public expenditures for education, for internal 
improvement, and interest on public debt, approximately 
$32,000,000. A little more than $29,000,000 of this will be raised 
by taxation, the remainder being derived from interest on our 
permanent educational fund and from our public building fund. 
Some $23,500,000 of this will be raised by the direct ad valorem 
property tax, and about $3,500,000 will be secured from the tax 
upon oil and gas production; nearly $1,000,000 from the auto- 
mobile tax; probably $500,000 or more from the income tax, 
and the remainder from corporation charter fees, annual license 
taxes, mortgage filing fees, inheritance taxes, the tax upon 

1 By Campbell Russell. Proceedings Eleventh Annual Conference Na- 
tional Tax Association. 1917- p. 50-5- 



TAXATION 337 

insurance companies, and small sums from various other sources 
that are of little concern to this conference. 

Oklahoma was among the first states to enact income and 
inheritance tax laws, yet after a ten years' trial they are still 
of comparatively little importance as revenue producers. Less 
than ^ of i per cent of the taxes collected in our state since 
these laws were enacted has been derived from the income and 
inheritance taxes combined. So far as actual results are con- 
cerned, we still rely almost wholly upon the direct property tax, 
designed to apply as uniformly as practicable to all classes of 
property. 

We note that the entire net income from all sources is subject 
to this tax ; also that this tax shall apply to all incomes derived 
from property owned, and from every business, trade, or pro 
fession carried on in this state by persons living elsewhere. 
Under this law the 1915 tax collected to date is slightly over 
$250,000, and the 1916 tax collected is a little more than $400,000. 
The increased collection is partly to be attributed to the fact 
that until the last legislature met there was no appropriation 
that the state auditor could use to pay expenses incurred in 
this work. The difficulty in collecting this tax has been greatly 
increased by the fact that for six years we had on our statute 
books an income tax law so viciously unjust in its provisions 
that practically no attempt at enforcement was made, and the 
public has been trained to consider the state income tax as 
largely a donation or free will offering to the state. A very 
large majority of our people agree that the net income tax law 
enacted in 1915 is just and equitable and should be enforced. 
The last legislature appropriated $5,000, payable annually, to be 
used for this purpose and no complaint is heard from any source 
that the state auditor has in any way neglected his duty in this 
matter ; yet a few figures will show the remarkably small per 
cent of this tax actually paid, although the 1916 tax is now 
long overdue. Clearly no additional collections are to be ex- 
pected where payment of same can be avoided. 

The personal income tax collected by the Federal government 
from Oklahoma citizens for the year 1916 was $4,428,000. As- 
suming that an equal amount of this was collected from each 
of the fourteen steps in the Federal classifications, and then 
applying to the incomes shown to have been received in each 
class the income tax rate of the state applicable to each portion. 



338 SELECTED ARTICLES 

we find the state should have collected from these same indi- 
viduals upon these same incomes the sum of $2,627,572. In 
addition to this, millions of dollars of Federal income tax were 
collected from incomes upon property owned and business done 
in Oklahoma by persons living elsewhere. These collections 
are not credited to Oklahoma and are not included in the 
$4,428,000 above set out. Under the state law these incomes 
are taxable in Oklahoma. No one can do more than estimate 
what this tax, if collected, would amount to ; but inasmuch as a 
large majority of our oil properties are owned outside the state, 
and that a very large proportion of our income taxes are secured 
from this class of business, it is not an unreasonable estimate 
to say that the tax from this source should equal the amount 
that as is shown above should have been paid by citizens of the 
state; but if we include only one-half of this amount, or $1,313,- 
786, we show $3,941,358 as the sum which the state should have 
collected for the year 1916 upon personal incomes, exclusive of 
the incomes received as dividends upon corporation stock, the 
Federal income tax upon which was collected at the source. 
Oklahoma has no corporation income tax, so that no one is 
entitled to any reduction on his state income tax for taxes col- 
lected at the source. Personal income taxes paid to the state 
would in many instances be largely increased by the addition 
to the taxable income of the dividends from corporation stock, 
the Federal tax upon which has been collected at the source. 
All things considered, $4,500,000 to $5,000,000 is a conservative 
estimate of the amount of income tax due the state of Oklahoma 
for the year 1916. Less than 10 per cent of this amount has 
been collected. 

Oklahoma has collected only a few thousand dollars in in- 
come tax from persons residing outside our state and this pro- 
vision of our law is now being vigorously contested in the 
Federal court by a citizen of Illinois whose income tax (as per 
statement rendered by him) due Oklahoma for the year 1916 
is over $76,000. This case (testing the constitutionality of this 
feature of our law) was heard before three district Federal 
judges in Oklahoma City two weeks ago, and will doubtless go 
to the Supreme Court of the L T nited States. It seems not un- 
reasonable to anticipate that the government that collects a tax 
upon the incomes derived from all property owned or business 
done within its jurisdiction, regardless of the citizenship or 



TAXATION 339 

residence of the owner, will probably sustain the right of each 
state to collect a tax upon incomes derived from property and 
business within the state, although the owner may live else- 
where. 

Our 191 7 legislature placed our income tax rate on the 
reverse gear, reducing the rate on the smaller incomes 25 per 
cent ; next step, 33^/3 per cent reduction ; next, 50 per cent 
reduction, and the rate on incomes above $100,000 was reduced 
60 per cent — from 5 per cent to 2 per cent, which is now our 
maximum rate. The argument advanced to secure this reduction 
was not, in the main, that the rate was unjust, but that the 
reduction was necessary in order to prevent our rich men from 
removing their residences from our state — assuming that thereby 
they could escape our state income tax, while still enjoying the 
profits from the property owned and business carried on within 
the state. Until our right to collect an income tax from persons 
living without our jurisdiction has been finally determined, it 
is hardly proper to include the possible collections from that 
source in estimating the per cent of the tax actually due which 
has not been collected; but considering only the amount unques- 
tionably due from citizens of Oklahoma, not more than 15 or 
16 per cent of the 1916 tax has been paid. The remedy is con- 
tained in one word, publicity. So long as the tax collector 
must play hide-and-seek in the dark with an unwilling tax- 
payer and must keep secret what he does discover, we may 
reasonably anticipate that results will continue to fall far below 
expectations. Personally, I see no good reason why incomes 
should be kept secret. The man who is able to secure a large 
income, if it be secured through honest endeavor, should not 
be ashamed of that fact. However, unless the necessities of 
war shall change the policy of the Federal government, we may 
expect the veil of secrecy to continue to screen the income tax- 
payer (and the income tax-dodger as well) from the public view. 
It is probable that through concerted efforts upon the part of 
interested states the Federal authorities may relax their rules 
sufficiently to permit the proper taxing authorities of a state to 
inspect the federal income tax records covering that state. 

The income tax collected by Oklahoma for the year 1916 
exceeds the combined collections of the other seven years, yet 
the collections for that year do not exceed 1.5 per cent of the 
total tax collected in the state for such year; these things 



340 SELECTED ARTICLES 

indicate somewhat the immensity of the tax problem. Taxation 
has long been and to the end of time will be one of the most 
difficult problems connected with human government. 



MINORITY REPORT ASSESSMENT AND TAXA- 
TION COMMISSION OF LOUISIANA 1 

The Commission is hopelessly divided on the question of sur- 
taxes and excess profit taxes, the vote being five in favor of 
surtaxes and excess profit taxes, and four against. 

A long argument was made before the Commission that the 
taxes should be levied according to a man's ability to pay in- 
stead of such tax being proportioned to his duty to pay. With- 
out discussing the entire report it is sufficient to quote the fol- 
lowing astonishing statement which, if our recollection does not 
deceive us, was read with approval by the majority of the Com- 
mission and inserted by the Chairman and was adopted over the 
protest of the minority. 

A study of the returns under income tax laws conclusively shows 
that the income tax is a tax on the rich and well-to-do. The liberal 
exemptions allowed by the Federal law exclude the great bulk of the 
population from its operation. 

According to the report of the Internal Revenue Department only 
about % of i per cent of the population is subject to the tax. 

In Wisconsin with lower exemptions, less than 3 per cent of the 
population come within the law, etc. 

Lyons on Income Taxes, p. 43. 

Therefore, without going any further, the majority of the 
commission can be understood as favoring surtaxes and excess 
profit tax, or, as the majority seem to prefer to designate them, 
graduated income taxes, because: 

1. They are a tax on the rich and well-to-do. 

2. Because they exclude the great bulk of the population 
from its operation. 

3. Because under the Federal Income Tax (a tax which 
should not once be considered, because it was levied to carry the 
burdens of a great war) only y 2 of 1 per cent of the population 
is subject to the tax. 

It is our idea of democracy that the burden of taxation 
should not be put upon one class of men even if that class of 
men happen to be rich. 

1 Report of the Louisiana Assessment and Taxation Commission to 
the Constitutional Convention. 1921. p. 55-60. 



TAXATION 341 

It is not our idea of democracy that the majority of the citi- 
zens of the State of Louisiana should welch [sic] on their obli- 
gations to the state and allow themselves to be supported by 
another class of people. 

We prefer to think as did our forefathers that there was 
enough manhood in every citizen of the state for each to bear 
his share of the burdens of the government. 

We believe in an income tax because we believe that the tax 
can be fairly levied, but we believe that it should be at the same 
rate for every citizen. We do not believe in heavy exemptions 
because if we are going to exist as a Republic we should not at- 
tempt unjustly to make one class support another. We prefer 
the simplicity of fairness and justice of our ancestors who had 
in their minds, hearts and Constitutions the proportionate bear- 
ing of the burdens of the state. 

In the Constitution of 1845, the following Article covered the 
right of taxation. 

Taxation shall be equal and uniform throughout the state. After the 
year 1848, all property on which taxes may be levied in this state shall 
be taxed in proportion to its value to be ascertained as directed by law. 
No one species of property shall be taxed higher than another species of 
property of equal value on which taxes shall be levied. 

The Legislature shall have the power to levy an income tax and to 
tax all persons pursuing any occupation, trade or profession. 

The same article was substantially embodied in the Constitu- 
tion of 1852. 

We still believe that some weight should be given to the 
character of the men who formulated and prepared these Con- 
stitutions for the state. Among these men can be mentioned 
Mazureau, John R. Grymes, Judah P. Benjamin, Randall Hunt, 
Pierre Soule, Christian Roselius, Claiborne and other men of 
like standing, whose characters stand out as beacons of light 
guiding to freedom and fairness in the conduct of government, 
who believed in a government "of the people, by the people and 
for the people" ; and such a government cannot exist where >4 
of 1 per cent of the population pay the expenses of the state. 

The very statement of this proposition will carry resentment 
to every thoughtful citizen of the state. Not only will it be in- 
jurious to the class who are bearing the burden, but it will be 
more injurious to the men who are avoiding their duties as citi- 
zens. What kind of a citizen would we have in Louisiana with 
such principles announced in the Constitution? 

The power of taxation is the most far reaching and danger- 



342 SELECTED ARTICLES 

ous power conferred on the state by the people. As Mr. Justice 
Miller has said in the case of Loan Association vs. Topeka : 

Of all the powers conferred upon Government that of taxation is 
the most liable to abuse. Given a purpose or object for which taxation 
may be lawfully used, and the extent of its exercise is, in its very nature 
unlimited. The power to tax is therefore the strongest, the most pervad- 
ing, of all the powers of government, reaching directly or indirectly to 
all classes of people. It was said by Mr. Chief Justice Marshall, in the 
case of McCulloch vs. Maryland that the power to tax is the power to 
destroy. A striking instance of the truth of that proposition is seen 
in the fact that the existing tax of 10 per cent imposed by the United 
States on the circulation of all other banks than the national banks drove 
out of existence every state bank of circulation within a year or two after 
its passage. This power can as readily be employed against one class of 
individuals and in favor of another so as to ruin the one class and give 
unlimited wealth and prosperity to the other, if there is no implied limita- 
tion of the uses to which the power may be exercised. 

To lay with one hand the power of the government on the property 
of the citizen, and with the other to bestow it upon favored individuals 
to aid private enterprises and build up private fortunes, is none the less 
a robbery because it is done under the forms of law and is called taxa- 
tion. This is not legislation. It is a decree under legislative forms. 

Loan Association vs. Topeka, 20 Wall, 655, p. 663-664. 

Can anything be stronger than the following sentence in the 

above citation : 

This power can as readily be employed against one class of individuals 
and in favor of another so as to ruin the one class and give unlimited 
wealth and prosperity to the other, if there is no implied limitation of the 
uses to which the power may be exercised. 

The undersigned therefore, sincerely hope that the Consti- 
tutional Convention will not be led into adopting any such 
Article as the majority have proposed. 

Respectfully submitted, 
E. T. Merrick, 
J. H. Heinen, 
J. R. Perez, 
A. M. Smith. 



THE INCOME TAX * 

Although the income tax appears to be receiving from tax 
commissioners little serious consideration as a practical method, 
it is deemed pertinent to give a summary of the conclusions ar- 
rived at by Delos O. Kinsman in his authoritative work. The 
Income Tax in the Commonwealths of the United States, 1903. 

1 Civic Federation of Chicago. A summary of the reports of Special 
State Tax Commissions. 1907- P- 7^4- 



TAXATION 343 

The author studied the income tax in each of the states 
employing it, dividing its history into two periods : "the first, 
that of the 'faculty' tax, closed about 1825. It was characterized 
by a loose method of determining the taxpayer's ability, the 
levy being made upon an estimated or assumed income of 
of the individual. The second period, that of the income tax 
proper, continuing to the present time, has been characterized 
by the attempt to assess and tax the exact income of the 
individual. Our study is concerned principally with the second 
period." A rapid survey of the first period, however, paves 
the way for a more detailed consideration of the second. 

After an examination of the subject by states, and a concise 
history of the results in each, Mr. Kinsman devotes his last 
chapter to a resume, from w r hich enough is quoted to make his 
findings clear ; 

System Extensively Tried 

We shall now give a brief resume before presenting our conclusion. 
We cannot charge the Commonwealths with slighting the income tax. Of 
the forty-five states, sixteen have made legislative provision for it, either 
in a general or special form; of about one hundred constitutions passed 
by the states, thirteen, representing eight states, have made special pro- 
vision for its use; and of some forty state tax commissions, which have 
been appointed by the different states, seven have treated it in their re- 
ports. 

The use of the income tax proper began about 1840 and has continued 
to the present time. Its history has been marked by three periods of 
special activity; one from about 1840 to 1850, during which decade six 
states introduced the tax; another from i860 to 1870, during which decade 
seven introduced it; and a third from about 1895 to the present, which 
has been marked by a revival of the movement. Of the sixteen states 
that have employed it, six are still using it — Massachusetts, Virginia, North 
Carolina, South Carolina, Louisiana, and Tennessee. 

Massachusetts has had the longest experience with the tax, extending 
from 1643 to the present time. South Carolina's experience began in 
1 70 1 and, with the exception of about thirty years, has extended to the 
present. Pennsylvania levied the tax from 1841 to 1871; Maryland, 
from 1842 to 1850; Virginia, from 1843 to the present; Alabama, from 
1843 to about t886; Florida, from 1845 to 1855; North Carolina, from 
1849 to the present time. With but one exception the states introducing 
the tax between i860 and 1870 employed it for only very short periods. 
Missouri employed the tax from 1861 to 1866; Texas, from 1863 to 1868; 
Georgia from 1863 to 1866; West Virginia during 1863; Louisiana, the one 
exception, from 1865 to the present time; Kentucky, from 1867 to 1872; 
Delaware, from 1869 to 1872. Tennessee tried the tax in 1883, but then, 
like Kentucky, only to a very limited extent. , . 

Methods Widely Varied 

The states employing the tax have spared neither time nor ingenuity 
in attempting so to frame the laws as to make the tax erfective. Every 
possible method has been tried. The tax has been levied as a general 
income tax upon all forms of income and as a special income tax upon 
one or more forms of income; without regard to the source of the income 
and modified according to the source; as an apportioned tax, and as a 
percentage tax. The rate has been made proportional, progressive, and 



344 SELECTED ARTICLES 

partly proportional and partly progressive. The exemption has been a fixed 
sum applied to all income and a sum varying with the form of income 
and with particular classes of individuals. The administration of the law 
has been under the direct supervision of the central government, and it 
has been left to the option of the local units. The tax has been em- 
ployed strictly as a war measure, as a peace measure, and as both. 

Of all the states using the tax, six have levied it as a general income 
tax, affecting all forms of income — rent, interest, wages, and profits. 
These states are Massachusetts, South Carolina, Virginia, Alabama, North 
Carolina, and Texas. The scope of the tax in Massachusetts, however, 
has varied with the different local interpretations placed upon the law. 
The remaining ten states have each taxed some one or more of the 
four forms of income. All of them except Georgia, Tennessee, and Ken- 
tucky have taxed incomes from personal services, salaries being especially 
mentioned; seven of them, all except Florida, Tennessee, and Kentucky, 
have taxed profits. Five, Delaware, West Virginia, Kentucky, Tennessee, 
and Missouri, have taxed interest. The rate of the tax has usually been 
proportional, although six of the states have made use of the progressive 
rate. 

An exemption has been very generally allowed, varying both in the 
different states and at different times in the same state. When a fixed 
sum has been allowed, it has been usually from $300 to $2,500, $500 and 
$1,000 being the most common amounts. The exemption at present allowed 
in South Carolina is $2,500. Many of the states have provided for 
special exemptions, such as the expenses of the business from which the 
income is derived and the incomes of particular classes of individuals, 
such as ministers of the gospel, state judges, and certain classes of 
laborers. 

The administration of the tax has been much the same in all the 
states. It has been assessed, as a rule, by the local assessors and col- 
lected by the local tax collectors. The laws have required that the tax 
should be levied by self-assessment, almost invariably under the severe 
penalties for failure to comply. 

Revenue Insignificant 

The revenue derived from the income tax has been insignificantly 
small. For instance, Alabama in 1882, during the period of her most 
successful experience, received an income tax of only $22,116, out of a 
state tax of over $600,000. In 1899 North Carolina's income tax amounted 
to only $4,399 out of a total tax of $723,307- Virginia in 1899 received 
only $54,565 from this source, while her state tax amounted to $2,132,368. 
South Carolina in 1898, while levying a state tax of about $1,000,000, 
received only $5,190 from her tax upon incomes. 

The attitude of the State courts toward the income tax has been one 
of sympathy. In the few cases upon the subject brought before them 
they have upheld the tax. Had all forces been as active in support 
of the system as the state courts, the tax would undoubtedly have been 
a success. . . 

Pronounced a Failure 

The experience of the states with the income tax warrants the con- 
clusion that the tax, as employed by them, has been unquestionably a 
failure. It has satisfied neither the demands for justice nor the need 
of revenue. The question arises: Is this failure due to qualities inherent 
in the nature of the tax, or is it the result of conditions which may 
be removed? One of the fundamental principles of taxation is that the 
subjects of a state ought to contribute to the support of the government 
in proportion to their respective abilities, and it is generally agreed that 
these abilities are best measured by income. Therefore, theoretically at 
least, an income tax is unquestionably the fairest system yet proposed. 
h ou^hout the history of the tax in the several states, the opposition 
has never seriously attacked it from a theoretical standpoint. 

If the failure is to be attributed to the application of the principle, 
either the laws have failed to embody this principle properly, or the 



TAXATION 345 

administration has been ineffective. While much of the legislation in 
the states relative to the income tax has been very satisfactory, . . . 
nevertheless laws have been passed repeatedly which, if properly admin- 
istered, would have distributed the burdens with unusual justice. But 
these laws have failed quite as completely as those with provisions less 
satisfactory. The failure of the tax, therefore, cannot have been due 
to the ill success of the laws in embodying the principle. 

A careful study of the history of the tax leads one to the conclusion 
that the failure has been due to the administration of the law. 

Self-Assessment Always Ineffective 

Although the laws have usually required the assessors to demand 
from each taxpayer a full statement of his income and to enforce their 
demand by a severe penalty, they have not only failed to do this, but 
in listing the individual's property have also entirely neglected his in- 
come or assessed it so low as to make the tax derived therefrom unim- 
portant. Before we can hope for a successful taxation of incomes, officials 
must be faithful in the performance of their duty. 

Not a little in the way of changing the attitude of the taxpayer 
toward the income tax may be done by a more careful framing of the 
laws, so that they will better appeal to his sense of justice. . . 

The English income tax ha; been satisfactory only where assessment 
at the source has been employed; where it has been necessary to rely on 
self-assessment, as it has been in one or two classes, the tax has been a 
failure. The State of Pennsylvania also has employed the method of 
assessing income at its source with marked success. 

The extent to which this method of assessment could be applied to 
general incomes in this country is uncertain. The Massachusetts tax 
commission of 1897 considered it practically impossible. With our present 
industrial organization, much income is derived from sources not acces- 
sible and consequently determinable only by the method of self-assessment. 
Indeed, it would often be very difficult for the taxpayer himself to de- 
termine the exact amount of his income; especially is this true of the 
agricultural classes and, indeed, of a large portion of the business and 
professional classes. In England industry is carried on in such a way 
that three-fourths of the income can be taxed with no question or demand 
of the individual taxpayer; this would be impossible in our states. While 
the method of assessment at the source can be applied to a few forms 
of income, and in so far as it is possible to do so the income tax would 
be successful, still we must also say that with our present system of in- 
dustry the method could not be applied by our states to a large part of 
the income received and that, therefore, a general state income tax must 
be a failure. 



BRIEF EXCERPTS 

There is no demurrer to the verdict that the state income tax, 
as it exists (1889) in three commonwealths (Virginia, Massa- 
chusetts, and North Carolina) is a mockery. Winthrop M. 
Daniels. The Elements of Public Finance, p. igi. 

A federal [i.e. national and state] income tax system neces- 
sarily involves multiple taxation on one and the same income, 
person, and property. David A. Wells. Theory and Practice of 
Taxation, p. 533. 



346 SELECTED ARTICLES 

A state income tax would work just as badly as, and in our 
opinion even more badly than, the present personal property 
tax. The real difficulty in the one case as in the other, is not 
with administrative methods, but with the inherent impossibility 
of localizing personalty or income. Edwin R. A. Seligman. 
The Income Tax. p. 428. 

In the United States income taxes have been employed by 
both the state and Federal governments. Altogether some six- 
teen states have imposed this tax at some period of their his- 
tory, but of these only six continued to use it January 1, 1903. 
The principal defect in the tax as a state tax is that it is im- 
possible to assess it fairly and that when it is imposed it has 
a tendency to drive persons with large incomes into other 
states where no such tax is found. It seems clear from Amer- 
ican experience that such a tax must be national in its scope, 
if it is to be even approximately just in its practical operation. 
Henry R. Seager. Introduction to Economics, p. 574. 

A man may live in one state and may secure his income partly 
from real estate holdings situated in another state and partly 
from investments in securities of corporations whose earnings 
are derived in many other states. How is it possible for any 
local or state administration successfully to ascertain or ade- 
quately to control such income of its resident citizens? Most 
of the state income taxes in the United States are, largely for 
that reason, the veriest farces, and under present economic con- 
ditions are not likely ever to become thoroughly successful. 
Edzvin R. A. Seligman. Essays in Taxation. Eighth edition. 
J 9 1 3. p. 383. 

The federal government has now added the income tax to 
its fiscal system. This tax is in all probability to be a permanent 
feature of our financial system. And the states will, with the 
further example of Wisconsin's success with a state income 
tax before their eyes, soon look to this form of tax as offering 
a practicable remedy for the evils of the personal property tax. 
The commissioner of internal revenue has all the administrative 
machinery necessary for determining the size of the individual 
taxpayer's income. Why should this costly machinery be 
duplicated? Already the states' tax commissions, boards of 



TAXATION 347 

equalization, and other administrative machinery are high in 
cost, and low in efficiency. More simplification and less duplica- 
tion are needed. And this means more cooperation. James 
E. Boyle. Annals of the American Academy. 58.-63. March 
19I5- 

The income tax, so far, has been a failure in every state 
that has adopted it. The main reason lies on the surface. The 
only way an income tax can be satisfactorily enforced in this 
country is by taxing the income at its source, on the English 
plan ; and no state has power to do that. A citizen of Wis- 
consin, for example, may derive a large income from steel 
stock or New York Central bonds. If he pays a state tax on 
that income it will be because he chooses to. The state cannot 
compel a corporation of New Jersey or New York to disclose 
the dividends and interest it disburses in Wisconsin. Or a 
Wisconsin capitalist may escape the tax by the simple expedient 
of taking up residence across the state border. Most of the 
larger corporations operate in many states and, to avoid an 
income tax in Wisconsin, can reincorporate elsewhere. A num- 
ber of corporation removals have been reported already. Satur- 
day Evening Post. 184:22. June 15, 1912. 

I omitted the income tax because I refer to income tax as 
entirely unsuited for state revenue. It is practicable, in my 
judgment, constitutional objections aside, to use the income tax 
for Federal revenue. The tendency of it is to tax income at 
source. That means that in every corporation which pays interest 
on debt, and dividends on its stocks, you must retain a percentage 
of the dividends and the interest and turn it over to the state. 
I need not elaborate on the methods of reaching income at 
source, or the points in the case of the corporation. Four-fifths 
or above of the revenue from the proposed income tax comes 
from the income tax reached at the source. It does not depend 
in the slightest degree upon the good faith of the recipient of 
the income. You subject the income to the tax before it reaches 
him. The point of that tax that is reached is the schedule, where 
they require statements to be made by the recipient of the 
income. It is impossible from the nature of our state juris- 
diction to levy state income taxes at source. Lazuson Purdy. 
First Annual Conference National Tax Association, p. 93. 



348 SELECTED ARTICLES 

Many theorists advocate an income tax as the fairest form 
of taxation. In theory there is much to sustain it. In practice it 
is almost universally a failure. In theory it seems just that a 
person should be taxed upon the net yield of his occupation 
or investments as the best gauge of his taxable ability, but in 
the levying of such a tax it has always been found that art, 
subterfuge, evasion, and downright perjury have rendered the 
system inefficient and futile. To tax capital property, lands, 
and also the income arising from their employment, is intolerable 
as double taxation; to exempt such property and rely upon the 
income from them alone leaves open a hundred ways for evasion, 
and is open to grave objections. It has been tried in several 
states, but has proved unsatisfactory in all, and it is a potent 
argument against this form of taxation that in the efforts that 
have been made in most states of the Union during the past 
ten years, to find new sources of revenue, there has been so 
little disposition to resort to income taxes. Report of the 
Special Tax Commission of Maine, p. 36. 

Examination of these various laws shows a lack of uniformity 
which is deplorable. There are many instances of double taxa- 
tion. That more protest against double taxation has not been 
heard is largely due to the fact that the states having income 
tax laws are not contiguous. When adjoining states pass in- 
come tax laws having the same diversity and variety marking 
present legislation, the situation becomes one for serious con- 
sideration. 

If we are to take as a criterion the legislation on income 
taxation already enacted and the legislation of the different 
states on inheritance taxation, it is futile to hope for very much 
uniformity in income taxation for many years to come. There 
must be concerted action, however, to prevent double, perhaps 
triple or quadruple, taxation of the same income. The laws 
already enacted plainly show that nearly all state legislatures 
are loath to permit non-residents to go untaxed on income 
received within their state borders. There is also a strong 
tendency to tax residents on all income received from intangibles 
regardless of the source. Frank D. Strader. Proceedings Na- 
tional Tax Association. V. 13. 

From the point of view of revenue produced the income taxes 
have been of little importance and, where retained, have become 



TAXATION 349 

almost a farce. This small yield is partly explained by the 
special character of the taxes imposed. It is partly explained 
by careless administration or failure to enforce the law. And 
this failure to enforce the law has been due, to an extent, to 
the fact that the taxes have frequently been regarded as class 
taxes, but more to the fact that their administration has been 
incidental to the work of local officials while the revenue was 
to be paid over to the state treasuries. And finally, where an 
honest effort has been made to enforce the law, the opportun- 
ities for evasion have proven too difficult to overcome. 

The state income taxes have been little better than failures 
in practice, and slight improvement can be expected so long 
as we rely upon the personal declarations of taxpayers in making 
assessments. Our experience with federal and state income 
taxes lends no hope that under ordinary circumstances can an 
income tax be made satisfactory unless by getting at the greater 
part of incomes before they come into the hands of the indi- 
viduals who bear the tax burden. But unfortunately, in state and 
local income assessment, especially if the taxes are supplementary 
to property and corporation taxes, this cannot be done to any 
great extent. State and local income taxes are not at present 
practicable measures. H. A. Millis. First Annual Conference 
National Tax Association, p. 444-5. 

The income tax, although advocated by good authority, seems 
to be more proper as a special or supplemental tax, where 
other sources of revenue fail, or for special demands like war. 

It is open to three objections : First that it is extremely difficult 
to collect fairly — so much so that in Germany, where that tax 
is laid, the proverb runs, "The bigger the income, the bigger the 
thief." It is a tax which is more readily evaded by the very 
rich than by any others, because it pays a rich man to employ 
the best counsel, to resort to legal artifices, or to remove his 
residence for the purpose of saving a considerable sum of money, 
while upon the man of moderate circumstances, especially those 
on a salary or having a fairly definite professional income, it 
falls with redoubled weight. 

Secondly, even a graduated tax has not that justice which 
appears on its face. For a poor man with a large family to pay 
anything out of an income which barely supports him is more 
of a hardship than for a wealthy man, who has only himself to 
care for, to pay a large proportion out of his superfluity. In 



350 



SELECTED ARTICLES 



order to impose anything like equal burdens, an income tax 
should be graduated with reference not only to the amount 
of income, but to the amount of necessary expenditures, and 
consequently with reference also to the social position of the 
individual. Thus a butcher's foreman with $1,500 a year who 
lives as butcher's foreman and men of the laboring class usually 
do, would find a tax upon his income far less burdensome than 
the small merchant who makes $1500 profit, but whose mode 
of living and dress, from the nature of his occupation, neces- 
sarily involves a much larger expenditure. But such graduation 
would be impossible. 

Thirdly, an income tax is paid, if paid at all, entirely out of 
savings. It tends to discourage frugality, and to undo the very 
work on which we have spent so much trouble in establishing, 
a savings bank system. All proposals for a graduated income 
tax necessarily provide for the exemption of incomes under 
a certain amount, for it would not pay to collect a tax on a 
laborer's wages. If, in order to remedy this, its payment be 
made a condition, it opens a wide door for corruption ; and, if 
not so constructed, such a system would exempt the greater 
part of the public from all share in the public burdens. 

"It is to be feared therefore that the fairness which belongs 
to the principle of an income tax cannot be made to attach to 
it in practice." Bolton Hall. Public Opinion. i3'-53- April 
23, 1892. 



